Terminations of bank mergers have reached a record high this year and it could well be next year before M&A activity in the sector can restart, according to one analyst.
“It won’t be a 2023 event,” says Nathan Stovall, director of financial institutions research at S&P Global Market Intelligence. “It will be 2024. Things aren’t going to get better. It will just take time.”
The collapse of Silicon Valley Bank and Signature Bank and the seizure of First Republic Bank have effectively killed any big mergers in the sector, Stovall says.
Terminations quickly reached a record this year when Toronto-Dominion Bank scrapped its planned $13.67 billion merger with First Horizon Corp. The two parties cited regulatory obstacles while media reports suggesting U.S. agencies were dubious about TD’s anti-money laundering policies.
Stovall points to the changes in the sector in the wake of the bank failures. “Look what happened to bank stocks,” he says. “Some people are going to reconsider because of changes in the sector. They’re looking at transactions in a very different light.”
West Virginia’s MVB Financial announced an acquisition of Integrated Financial last August, but the all-stock deal, which was valued at $98.6 million when it was announced, was only worth $47.4 million when it was terminated on May 9.
Interest rate hikes by the Federal Reserve played a role in the bank collapses and have dampened earnings at some institutions, but neither these nor regulatory obstacles have been the major causes of deal terminations.
“It’s like there’s two parallel realities,” Stovall says. “Stock prices don’t reflect the fundamentals. Given what happened, it’s a far cry from the ‘sky is falling.’” But fear is rampant in the sector regardless and activity has halted almost completely.
Increased regulatory scrutiny is doubtlessly playing a role, too. “They’re embarrassed about what happened (with the SVB collapse),” Stovall says of the regulatory agencies. “They are a lot more cautious, absolutely. There’s no way there is going to be a looser approach.”
Foot-dragging by regulators comes with a cost. Customers and staff are left in limbo if approval is months away, and there is a risk that they will start to walk. The decision to abort the TD-First Horizon deal was mutual, Stovall notes, as neither bank wanted to take a chance on waiting.
“Bank runs used to take a week or two,” Stovall says. “Now they can happen in a day or two. That’s scary.”
In recent times, there would be around 200 bank transactions in a normal year. But there have been only 30 in the first five months of 2023. “There will be more terminations,” Stovall warns. “The transactions year-to-date are beyond anemic.”
The Fed is getting closer to stopping its rate hikes, but it will take time before the dust settles and regulators feel they can show they have things under control. For the time being, valuations are changing due to the uncertainty in the market.