Bankers are getting more pessimistic about the near-term outlook for bank mergers and acquisitions after the specter of recession and other factors slowed activity this year.
Among bankers surveyed by Stephens Inc. this month, 81% expect a deceleration in bank M&A deals over the next 12 months.
The 19% who expect an increase in M&A marked the smallest share since Stephens began surveying bankers about their outlooks in 2017. The figure had never before dipped below 50%, the firm says. In January, 68% of bankers projected an increase in deal activity.
Calling the M&A outlook "bleak," the Stephens analysts said bankers most often cited "economic uncertainty" as the primary reason behind the anticipated slowdown. Stephens surveyed 114 bankers.
Driving factors include the spike in inflation that followed Russia's invasion of Ukraine in February — reaching a 30-year high in the second quarter. This galvanized Federal Reserve policymakers to ratchet up interest rates to rein in soaring prices. Worry about a
The Stephens survey found that 50% of bankers are concerned about credit quality deterioration and higher loan charge-offs in 2023.
Recessions often hamper borrowers' ability to repay loans, causing higher credit losses for banks. This includes possible sellers; as a result, many
"No question, credit quality becomes more of concern as the economy tapers off," said Ken Thomas, founder and CEO of Community Development Fund Advisors in Miami.
Additionally, some would-be buyers have moved to the sidelines in the wake of elevated regulatory scrutiny ordered by
What's more, the KBW Nasdaq Bank Index was down more than 20% through the first eight months of 2022. When banks' shares are down, it makes it more difficult to strike stock deals.
"Big parts of the slowdown are regulatory and the pressure on stocks," said Robert Bolton, president of the bank investor Iron Bay Capital.
There were 114 bank acquisitions announced through the first eight months of 2022, according to S&P Global Market Intelligence data. At that rate, the market would see 171 deals signed this year, far below the 206 announced in 2021.
Banks report solid commercial and industrial loan demand, but are increasingly concerned about how soaring inflation and the specter of recession will affect their clients.
The Stephens analysts also surveyed 48 bank investors this month and found that 65% of them expect slowing M&A activity over the next 12 months. They too are concerned about a potential recession and the loan losses it could spur. This also appears to be a leading reason for bank stock weakness, the analysts said in a report.
The survey showed 98% of investors expect loan charge-offs to increase over the next 12 months.
"Uncertainty regarding future credit quality trends appears to be the limiting factor on why investors may not be adding to their positions," the Stephens team wrote. "Virtually all investors are assuming pressure" on borrowers' collective ability to service their debts.
