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US bank M&A bounces back in H1 with advisers expecting even more in H2

U.S. bank deal activity bounced back in the first half of 2021, and some deal advisers think it might only be the beginning.

Deals cratered near the onset of the COVID-19 pandemic, creating some pent-up demand in a banking industry that has been consolidating for decades. Further, the pandemic intensified many of the catalysts that have been driving banks to merge. More consumers adopted mobile and digital banking, underscoring the need for tech investments that get easier with a large balance sheet. A crush of extra cash has led to excess liquidity at many banks, weighing on margins. And while the economy is showing signs of life, loan growth has yet to materialize and interest rates are near historic lows, straining fundamental drivers of banks' earnings and encouraging a search for new revenue sources.

"It's difficult in this environment to grow organically. It's not to say that it can't happen, but it is challenging. A significant acquisition gets you there much faster," said Gary Bronstein, a banking lawyer and partner at Kilpatrick Townsend & Stockton.

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There were 94 deals announced in the first half, a significant jump from the second half of 2020 and up from 50 in the year-ago period. While the number of deals still lagged pre-COVID levels, the total deal value of $32 billion was significantly higher than most years. Transformative mergers-of-equals and other megadeals drove the elevated deal value total as some banks are eager to gain significant scale to invest in technology and build national brands in the face of multibillion-dollar tech budgets at the largest banks and a burgeoning landscape of neobank start-ups that are scooping up deposits with slick mobile offerings.

The largest deal announced during the first six months of the year was M&T Bank Corp.'s acquisition of People's United Financial Inc., which came with a deal value of $7.60 billion at announcement on Feb. 22. Six deals with values of more than $1 billion were announced during the first half of the year, three of which were mergers of equals.

"If scale is a driving factor of consolidation, nothing's more powerful than an MOE," Christopher Olsen, managing partner for Olsen Palmer LLC, said in an interview. "You'll continue to see [MOEs] as long as scale is a key driver of activity."

Olsen said the first half of activity represented an acceleration of momentum for deal activity but that the second half should be even stronger. Olsen said his company, which serves as a financial adviser on bank deals, has never had a deeper pipeline of M&A deals in the works.

"We've probably got as many existing engagements, near-term engagements, active discussions that I have ever seen in almost three decades doing this," he said. "Banks of all sizes are looking for some solutions to some pretty challenging issues."

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Improving U.S. bank stock prices have opened the door for more M&A, Bronstein said. As of July 7, the KBW Nasdaq Bank index was up 25.96% since Jan. 1.

Median deal value to tangible common equity has slowly climbed throughout the first six months of 2021, recovering from the lows seen during 2020 when COVID-19 uncertainty pressured U.S. bank stocks. The median deal value to tangible common equity stood at 165.1% for the 26 deals announced in June, up from 129.5% among the 14 deals announced in January.

"As the stock prices for buyers improved, it provided [buyers] with an opportunity to pay a higher premium. So I think for sellers that made M&A more attractive. And the difference between what a seller might be looking for and a buyer might be looking for narrowed as a result of that," Bronstein said. "[Deal activity] is going to continue so long as bank stock prices hold up."

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