Momentum in the bank M&A marketplace continues to build as August notched one of the higher monthly deal counts of late. Deal talks continue to accelerate and the oft-prophesied era of elevated consolidation looks increasingly imminent.
Deal pricing was largely unchanged in August relative to recent months as the median price-to-tangible book value (“P/B”) and price-to-earnings multiples were 1.34x and 13.0x, respectively.
A discussion of bank M&A activity would be thoroughly incomplete without addressing how the FOMC’s recent 50bp rate cut may impact the M&A marketplace. While dealmaking of late has been beset by a number of friction points including a liquidity crisis, bank failures, a leg-down in bank stock valuations, and an opaque economic outlook, a primary factor complicating M&A discussions has and continues to be the advent of appreciable bond losses catalyzed by the FOMC’s tightening campaign launched in early 2022. Unfortunately, those counting on FOMC rate cuts to erase bond losses may be disappointed. While the FOMC did in fact cut its target rate by 50bp, the long end of the yield curve actually increased slightly in the immediate aftermath. Put differently, as feared but as expressed in this space previously, any FOMC rate cuts prompted an un-inversion of the curve through a decline in the short end of the curve, leaving long rates – the primary determinant of bond losses – relatively unchanged.
That said, we expect this and any additional forthcoming cuts to further spur M&A activity, especially as a number of would-be sellers were otherwise awaiting rate cuts before proceeding with a sale. Additionally, the FOMC cut will ease deal-prohibitive purchase accounting adjustments, prompting incremental transactions. Accordingly, we proffer a targeted suggest for potential sellers: consider proceeding sooner than later in order to maximize optionality and get ahead of the shallowing of the buyer pool; in other words, beat the herd.
For assistance with answering questions or if we can provide additional information, please feel free to contact us.
Contact: info@olsenpalmer.com