Balance sheet, M&A and capital raising strategies for a volatile environment

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Bank advisers and market participants believe bank M&A and IPO activity is in a holding pattern and will pick up once there is greater clarity over the macroeconomic and interest rate environment.

That was the message delivered by a variety of presenters at S&P Global Market Intelligence's annual community bankers conference on May 19 and 20 and was highlighted in the latest "Street Talk" podcast.

Attendees at the conference were keen to hear how to best to prepare in periods of volatility, much like the one witnessed over the last few months since the Trump administration announced a broad suite of tariffs on April 2. Those protectionist policy led to spread widening in the credit markets and sparked considerable volatility in bank stocks. The path of interest rates remains just as uncertain as the Federal Reserve and the bond market weigh the prospect of slower economic growth against inflation and a wider deficit.

Scott Hildenbrand, chief balance sheet strategist and head of depository fixed income at Piper Sandler, said that banks should not try to predict interest rates and instead should prepare for different outcomes. He said banks need to recognize that 80% of their net interest income is driven off only 20% of the yield curve. He encouraged banks to understand what parts of the yield curve drive their business and then create triggers tied to movements in interest rates that would prompt balance sheet actions.

"We should be walking out of [asset/liability committee] already knowing what we're going to do when we hit those triggers so that I don't write a memo to my boss after everything has happened to talk about how to protect what just happened," Hildenbrand said.

Many banks are seeking to lower deposit costs further and the maturity schedule of their certificates of deposits (CDs) will be play a significant role in future deposit pricing. As those CDs mature, banks likely will have to meet the market rate to keep the funds. Joe Kennerson, managing director at Darling Consulting Group, said banks have reported funding cost relief through April as their higher-cost CDs matured. However, in the absence of further rate cuts by the Federal Reserve, Kennerson said banks might have to balance lowering costs against growing their deposits.

Some banks have used acquisitions to bolster funding. In the last tightening cycle, more than handful of banks in the metro markets purchased deposit-rich banks with low loan-to-deposit ratios in more rural markets. There have not been many of those deals recently, but Mark Kanaly, a partner at Alston Bird, said that he expects to see more of those deals in the future as the M&A market warms up.

"I do think the M&A wave that we've been talking about will gradually pick up. It's not going to be explosive, but I think it will gradually pick up again. I think a lot of these smaller core deposit franchise that you're talking about, the low loan-to-deposit ratio, I think they'll finally see clear sky to get that magic number they want," Kanaly said.

Scott Studwell, head of depositories and co-head of equity capital markets at Stephens, said M&A activity showed signs of picking up earlier in 2025 but the emergence of tariffs and fears over potential issues in the macro economy pushed passive investors to sidelines from the banking group. He still believes the fundamentals to support deals remain in place but noted that the macro environment will play a large role in future capital flows.

"Over the last seven years, we've had, what, four, one in 100-year storms hit. So it's not going to be linear. But I think overall, when you peel back the noise, sentiment is still pretty good despite all the challenges we seem to be faced with," Studwell said.

Michael Corso, principal and head of depositories at Hovde, shared a similar sentiment and noted that the valuations in the sector likely will be capped until there macro backdrop becomes more certain and trade deals are reached. However, he noted that most sellers are taking a buyer’s currency in a transaction, so they should focus on the exchange ratio in the deal rather than the sticker price.

"For expectations related to M&A, I think 175% of tangible book value is kind of the new 225% of tangible book value," Corso said. "At the end of the day, if you're doing an all-stock transaction, you're really making an investment in the acquirer, right? And so based on a fixed exchange ratio, if we do get some of this good news over the next several months, that's going to be reflected in the buyer's currency."

Advisers were also hopeful that capital raising activity will eventually rebound, including bank IPOs. Few banks have gone public in recent years, but Studwell said there are a number of banks evaluating going public. He ultimately believes that a rebound in M&A activity will bring a resurgence of IPOs with it as investors still want to see capital with a purpose.

"There's definitely planes on the runway. A lot of companies during this volatility maybe paused those processes, but there's some that kept going. They've been out testing the waters and really getting themselves ready," Studwell said. "There are probably a dozen or so companies around the country we're aware of that are either on the runway or getting ready to get on the runway."