While March Madness may be upon us, the bank M&A arena has been less frenzied. Bucking the up-and-down pattern traced in recent months, February’s deal count was similar to January’s while, more broadly, nascent deal discussions – a leading indicator of M&A announcements are freshening.
Indeed, through February, 2024 annualized transaction volume is on pace to be ~35% higher than in 2023 buttressing a hypothesis that the banking industry is on the verge of an era of elevated consolidation. The proverbial match that will light a broader bank M&A fire will likely come in the form of greater visibility on: 1) economic and credit conditions; 2) bank stock prices; and 3) interest rates.
On the latter, rate-driven bond losses have been the primary deterrent of dealmaking in recent years as buyers and sellers have grappled with transactional implications. For example, many buyers approach seller bond losses as a total loss, a stark fallacy given that buyers will recoup 100% of seller bond losses in their entirety post-transaction, albeit over time, either via accretion through maturity or incremental yield captured through portfolio rebalancing.
A similar misconception by would-be sellers is a tabling of a potential sale until rates decline and bond losses dissipate. Unfortunately, this may also prove fallacious: if and as the FOMC starts cutting, empirical data suggest the impact will be seen primarily in the shorter end of the curve with a lesser impact on long rates which drive bond losses. In other words, as opposed to a parallel decline in the yield curve, FOMC cuts may just cause the yield curve to un-invert. If so, rate cuts may unfortunately provide only limited remedy for bond losses, a finding to be factored into M&A planning and timing.
Valuations remained somewhat stable in February though few transactions reported terms. On pricing, we recently hosted a Webinar discussing best practices for determining a bank’s actual sale value which is available for on-demand replay, please email info@olsenpalmer.com for details.
For assistance with answering questions or if we can provide additional information, please feel free to contact us.
Contact: info@olsenpalmer.com