A sustained recovery in bank stocks this summer coincided with a late July burst in merger-and-acquisition activity. Bankers and investors say it may mark the beginning of a trend.
While down Thursday amid a spate of profit-taking, the KBW Nasdaq Bank Index was up 18% year to date through the end of July, with much of the advance coming last month after the Federal Reserve indicated it could cut interest rates as soon as September. On Wednesday of this week, Fed officials met and left rates unchanged and at a two-decade high. But they reiterated openness to a downshift, given a sharp reduction in the pace of inflation — from a peak above 9% in 2022 to 3% at the midpoint of this year.
"Assuming there is no resurgence in inflation, which is our base case, the Fed has essentially set the stage for its first rate cut in four years, starting in September — also in our forecast," said Raymond James Chief Investment Officer Larry Adam.
A rate cut would lower borrowing costs and could stimulate stronger loan demand that could bolster banks' interest income. Reduced credit costs could also ease concerns about vulnerable borrowers defaulting on loans. This helps to explain the renewed interest in bank stocks.
For M&A, bank buyers' ability to use their shares as currency to pay for acquisitions increases substantially when valuations are on the rise. Sellers are more likely to embrace deals backed by strengthening stocks.
During the current earnings season, several bankers have said a recent rebound in bank stock valuations could drive a surge in deal talks in the second half of 2024.
"There are conversations currently happening with stock, and I think it will increase with the stock market recovery," Brad Elliott, CEO of the $5.2 billion-asset Equity Bancshares, said on the Wichita, Kansas-based company's recent earnings call. "There's lots of positive momentum in the second half of the year."
In the final third of July alone, five substantial all-stocks bank acquisitions were announced. This included the third largest M&A transactions of the year so far by price: Tupelo, Mississippi-based Renasant Corp.'s announcement Monday that it struck a deal to
The
The deal added to a
Also in late July, the $18.1 billion-asset WesBanco
The $2.6 billion-asset ChoiceOne Financial Services in Sparta, Michigan, agreed to acquire in-state rival Fentura Financial in Fenton for
The buyer said the all-stock deal to buy The First Bancshares would create a combined bank with $25 billion of assets.
Additionally,
Last week, the $6.2 billion-asset German American Bancorp in Jasper, Indiana, said it
Of course, merger discussions often play out over several months. Near-term developments, including stock market fluctuations, are not the only factors at play in cinching deals. Buyers consider everything from the strength of the target's balance sheet to the health of the broader economy.
That latter factor proved sturdy throughout last year and the first half of this year, adding to business owner confidence and supporting sentiment about M&A.
The national Citizens Business Conditions Index — compiled by Citizens Financial Group in Providence, Rhode Island — rose to 52.2 in the second quarter from below 50 earlier in the year. A reading above 50 indicates that economic momentum is building. Citizens cited rising business revenue and expectations for lower rates.
"Increasing company revenue drove the Index higher in the second quarter as our clients felt some wind in their sails," said Eric Merlis, managing director and co-head of global markets at Citizens.
"The second quarter index reading shows a business environment that is turning the corner with the prospect of easing monetary policy and cheaper capital," said Merlis. "Concerns about inflation persist but the economy has shown resilience and seems poised for greater expansion."
KPMG said M&A across all industries is mounting. It surveyed 200 dealmakers on their outlooks and found 57% expect their next deal will happen this year.
A majority (64%) of acquisitive companies said a rate decrease of only a quarter (25%) or half a percentage (39%) would be sufficient to stimulate more M&A.
"I'm optimistic about the deal market for the rest of 2024 and into 2025," said Carole Streicher, head of deal advisory and strategy for KPMG U.S. "We've already seen dealmakers get comfortable with the 'new normal' of elevated interest rates and consistent uncertainty, but when that new normal tips to the more positive, there's a potential for activity to take off."