An executive order signed by President Biden in early July is expected to bring more scrutiny of banking mergers, a significant development given that the number of deal announcements continues to gain steam heading into the second half of the year.
The order encourages the Department of Justice, the Federal Reserve, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency “to update guidelines on banking mergers to provide more robust scrutiny of mergers.” Its aim is to address the perceived lack of competition in the banking industry as a result of consolidation, and avoid negative impacts on small businesses and consumers including those that are underserved by the banking system or not currently a part of the banking system.
In our opinion, the order will likely have greater impact on institutions with assets in excess of $100 billion—super regional or large regional institutions—versus community banks, which is in line with the order’s broader theme of promoting competition in the American economy.
M&A activity returning to old form
There were 94 bank merger or acquisition deals announced this year through June 30, according to data compiled by S&P Global Market Intelligence, compared to 112 deals in all of 2020. While this year’s levels are still trailing the volumes pre-dating the pandemic, the return of M&A activity is a welcome sign for bankers looking for growth and to gain efficiencies in the face of low interest rates and rising costs associated with increased regulatory oversight.
Along with the increase in the number of deals, deal multiples are increasing as well. The median deal value-to-tangible common equity was 1.52 as of June 30, compared to 1.35 for all of last year and 1.58 for all of 2019, indicating that buyers are finding greater value in targets that supplement or complement their organizations.
Q2 earnings calls highlight importance of M&A
Roughly 75% of the nearly 90 banking organizations that conducted second-quarter earnings calls between July 13 and July 25 provided commentary on recently completed, announced or prospective acquisitions, underpinning the importance of M&A activity as a strategy to drive growth if the pricing is right.
Of note during these earnings calls, most organizations remained moderately positive to bullish on their ability to conduct M&A activities. Examples include:
- Old National Bancorp: During its July 20 earnings call, Old National’s chairman and chief executive officer, Jim Ryan, indicated that despite the recent executive order, there has been no news from regulators about any coming changes and the organization is proceeding “full steam ahead” with its acquisition of First Midwest Bancorp.
- Citizens Financial Group: During its July 20 earnings call, chairman and chief executive officer Bruce Van Saun said the company is open to bank deals that make strategic sense. “If we can find a good deal, we would certainly consider it,” Van Saun said.
Yet, as noted in Valley National Bancorp’s earnings call, pricing will remain a key factor in any M&A deal where the lack of targets and valuations don’t make current economic sense.
Long-term impact remains to be seen
As noted in the full executive order, regulators are “encouraged to review current practices and adopt a plan, not later than 180 days after the date of this order, for the revitalization of merger oversight under the Bank Merger Act and the Bank Holding Company Act of 1956.” Once such a plan for further review of M&A transactions is created, it will take additional time to fully implement.
Some in the industry have speculated about how this executive order may affect deal flow. There will likely be more clarity around potential impacts as we near the 180-day mark after the date of the order, which should coincide with public companies providing updated guidance on acquisition strategies during their fourth-quarter earnings calls.
The specifics of what the order means for banking institutions is still unknown, yet we can reasonably assume that the updated process will focus on an M&A event’s impact to external stakeholders of super-regional or large regional institutions.
As such, these banking institutions—and even industry participants as a whole—looking at M&A to grow should ensure that they have appropriately considered the impact to customers and small business owners. Ensuring that a merger doesn’t lead to higher costs of banking, restrict access to credit or leave communities without access to banking will likely be a strong first step toward thriving in what is likely to be a tougher regulatory environment.