Yield curve compression is putting the banking sector in the news as financials join a market-wide sell-off. The bad news day offers a chance to re-examine the bull case for M&A in the industry. Bank deals lagged historical value in the first quarter this year due, at least in part, to low interest rates, which place revenue pressure on lenders. And recent news reports point to a more tangible problem for financial institutions: after years of consolidation, there are simply fewer logical targets for would-be acquirers. Can the defensive M&A wave continue in the face of these headwinds?

There are reasons to be at least cautiously optimistic. Banks’ second quarter M&A performance implies a resurgence in dealmaking, according to S&P Global Market Intelligence. The need to compete with larger banks is forcing a grab on technology that could motivate further dealmaking among the regional banks representing an increasingly large share of merger partners. S&P notes that banks with $10 billion to $50 billion in assets composed 4 percent of targets this year, up from the historical 1 percent.

Banks have announced more deals in the first seven months of this year than in all of 2020. At $290 billion, assets sold year to date could be on track to beat 2019’s pre-pandemic figure of $410 billion. Deals like PNC Financial Services Group’s $11.5 billion takeover of BBVA USA is one such boon.

If buyers are increasingly comfortable shelling out for technology and scale, there could be at least some motivation to grapple with a shrinking universe of targets.

— Brandon Zero