Banking mergers in recent years have been few in number and smaller in size, impacted in part by several bank failures in 2023 that led to heightened regulatory scrutiny among other challenges. Mergers and acquisitions (M&A) within the banking industry have also been hampered by macroeconomic conditions, such as higher interest rates, lower valuations and other regulatory pressures like the proposed Basel III Endgame[1], which would set a higher capital reserve standard. With the current rate environment, potential revisions to Basel III and newfound optimism around the M&A market, we at A&M believe the opportunity for bank acquisitions is improving. Therefore, banks should be getting diligence and integration routines in-place now, so they are prepared to act when ready.

Bank M&A Activity in 2024

In 2024, the number and size of deals are on pace to surpass last year’s totals. Through October, banks announced 99 deals — 28 of them in September and October alone— while there were just 98 deals announced for the whole of 2023, indicating increased momentum.[2]

While the majority of bank sales and mergers have occurred among smaller community banks, the deals are trending larger with a total acquisition value of $12.5 billion so far in 2024, a volume nearly three times the $4.3 billion aggregate deal announcements in 2023.[3]

Some of the larger deals include:

• Renasant Corp.’s announced purchase of First Bancshares of Hattiesburg, Mississippi for$1.2 billion; and
• SouthState Corp’s $2 billion deal to buy Independent Bank Group of McKinney, Texas.

The anticipation — and now the reality — of interest rate cuts by the Federal Reserve, together with higher bank valuations, may have helped oil M&A machinery. As economic conditions for banks continue to strengthen and optimism for deal making increases, more banks may look to M&A as a strategic level to build scale, divest of underperforming assets, or invest in non-traditional banking venues, such as payments and other specialty businesses.

Greater Scrutiny Has Challenged Banks, Impacting Mergers

The bank failures of 2023 directly led to a tougher regulatory response in the United States in an effort to prevent further risks. After the collapse of Silicon Valley bank, Signature Bank and First Republic Bank[4], some regulators stepped up warnings to big banks that they could face restrictions on certain activities.

Similarly, the uncertainty around the Basel III Endgame reforms have led to questions around appropriate levels and types of capital, another worry that had negatively affected bank mergers recently. As we process the results of the recent presidential and congressional elections and gain better clarity into how the forthcoming political environment will affect the regulatory environment, we anticipate M&A conversations and deal activity will pick up. This assumes that bank leaders can begin to envision an environment that is more conducive for bank acquisitions and consolidation.

Until Recently, Bank Valuations Had Been Pressured by High Interest Rates and Credit Risk

Until recently, inflationary risks and high interest rates have pressured bank valuations, creating uncertainty in deal making. While these risks have put pressure on bank valuations recently, equity values have improved as the Federal Reserve has begun lowering rates. The results of the recent presidential election have increased optimism for bank stocks further aiding trading multiples.

Dealmaking has understandably slowed down until recently as bank valuations have been hindered by these conditions. As conditions improve, and bank leaders take actions to bolster profitability and value, optimism for bank deals will likely increase.

What to Expect in the Near Future

With improving interest rates, the potential restructuring of the Basel III Endgame providing capital relief, and clarity in the U.S. presidential race we anticipate there will be higher levels of interest in merger activity.

We anticipate that bank and non-bank acquisitions as well divestitures should heat up in the fourth quarter of 2024 and into 2025. With all of this in mind, banks should take the opportunity now to start planning their set of moves to position themselves for growth, taking advantage of opportunities to build scale, meet customer needs, improve capabilities, and optimize performance. As the adage goes, banks are sold, not bought. In an environment where conditions for bank M&A are improving, and with a couple of years of pent-up demand, now is the time to prepare for what should be an active couple of years.

[1]Explainer: What is the 'Basel III endgame' and why are US banks worked up about it? | Reuters

[2]S&P S&P Cap IQ M&A Summary for Financial Institutions

[3]https://www.americanbanker.com/news/bank-m-a-deals-substantially-bigger-in-2024

[4]US banking crisis: federal body prepares to put First Republic into receivership | Silicon Valley Bank | The Guardian