BankM&A activity has slowed fairly considerably year, and while the rationalefor deals still exists, few expect a material pickup anytime soon.
Throughmid-September, there have been 168 announced bank deals in 2016, or 238annualized, down close to 15% from the 287 deals announced in 2015.
Thisyear, announced bank deals have equated to nearly 2.8% of banks in theindustry, the lowest level of consolidation since 2011. In 2015, announced bankdeals equated to nearly 4.6% of banks in the industry, the highest percentageof consolidation since at least 2004. From 2004 to 2013, the measure rangedfrom 1.4% to 3.4%.
The slowdown in bank M&A activity has followed erosionin bank stock currencies. As buyers' capacity to pay waned, deal multiplesdropped in kind.
Bank stocks took considerable hits early this year, largely due tomacroeconomic concerns. As oil prices headed lower, fears that a globaleconomic slowdown could lead to a U.S. recession weighed on the market. Someinvestors also grew concerned that the credit cycle could be turning.
The SNL Bank & Thrift Indexfell as low as 134% of tangible book value in early February but has bouncedback since then, rising to roughly 149%. They are still below the levelswitnessed at year-end 2015, when the bank group traded at nearly 165% oftangible book value, down slightly from 175% at the close of 2014.
While the bank group has rebounded from the in February, the marketshave remained fairly volatile. Swings in the market have often stemmed fromglobal events like Brexit and other developments that changed the outlook forinterest rates. The prospect of rate hikes has often led to sell offs in bankstocks, despite many investors arguing that higher rates will offer relief todepressed net interest margins.
As the outlook for rates remains uncertain, so does theforecast for M&A activity. Bank advisers presenting in late September at the 8th annual M&ASymposium hosted by S&P Global Market Intelligence said they do not expecta significant pickup in deals as the pool of buyers could be shrinking whileseller expectations remain fairly high.
They said that M&A in Texas, once of a hotbed of dealactivity, has slowed notably with decreases in oil prices. Throughmid-September, 13 deals surfaced in Texas, representing 7.4% of all U.S. bankdeal activity. That is down on an annualized basis from 22 deals in 2015 and 27deals in 2014, when Texas transactions equated to 7.9% and 9.5% of all U.S.bank deal activity.
While 2016 has brought several large deals, thosetransactions are unlikely to pick up any time soon. Sullivan & Cromwell LLPSenior Chairman H. RodginCohen said at the M&A Symposium that the nation's largest banksremain on the "no buy" list by regulators, keeping the pool of buyersequipped for sizable deals to a minimum.
Five bank deals with values over $1 billion have beenannounced so far in 2016, flat with the prior year. In each of 2014, 2013 and2012, just two bank deals with values over $1 billion surfaced, while threedeals apiece with values over $1 billion were announced in 2011 and 2010.
The vast majority of transactions have involved smallerinstitutions, and that seems unlikely to change soon. There might even be fewerinstitutions looking to acquire smaller banks since those deals often do notmove the needle that much and could prove more trouble than they are worth forsome would-be buyers.
Rory McKinney, managing director and co-head of investmentbanking at D.A. Davidson, said at the M&A Symposium that the buyerlandscape represents the biggest threat to bank M&A today, as the universeof potential acquirers of small banks is shrinking.
If there are fewer acquirers, it stands to reason thatpricing could come under further pressure. Bank deal prices fell to a median of 130.0% of tangible book value and18.6x earnings through mid-September, compared to 140.7% and 22.8x earnings in2015, and 134.1% of tangible book and 21.8x in 2014.
Banks that have held off on selling for some time with hopesof fetching higher prices in the future could find themselves disappointed.C.K. Lee, a managing director in the financial institutions group at CommerceStreet Capital, encouraged banks to have a sales strategy in place so they canstrike the iron while it is hot.
"I think there is a backlog of deals that needs to becleared and I think it's going to have an impact downward on pricing. A lot ofthese folks' expectations are unreasonable and I think they're going to get aneducation," Lee said at the M&A Symposium.