Dealmakers tap the brakes on bank M&A

Bank merger and acquisition activity slowed to a crawl in April, punctuating a trend this year as would-be buyers grapple with struggling stock prices, increased pricing and greater regulatory scrutiny.

“Everybody’s just extremely cautious right now,” Jacob Thompson, a managing director of investment banking at Samco Capital Markets, said in an interview.

There were just nine U.S. bank M&A deals announced last month, according to S&P Global’s running tally. It was the lightest month of activity since July 2020, when only seven deals were inked amid the ongoing pandemic, and it was down from 24 in the same month a year earlier.

As banks pushed for scale, talent and new markets, M&A activity rebounded in 2021 to 209 deals, up from 112 the prior year, according to S&P data. Through April of this year, however, there were just 56 deals made public, putting the industry on pace for a total of 168 in 2022.

Thompson noted the projected total may fall should the rest of the year follow April’s pace.

With bank stocks dropping alongside the broader market amid inflation and recession worries amplified by the war in Ukraine, banks that use their shares to pay for acquisitions are suddenly ill-equipped to negotiate deals, Thompson said. The KBW Bank Index, a broad measure of bank stock performance, is down more than 15% year to date.

At same time, Thompson said, sellers this spring abruptly raised their pricing expectations after the Federal Reserve’s decision in March to raise interest rates. When rates climb, banks usually earn more interest on lending, and sellers are of the mind they deserve higher prices, Thompson said.

“So you have a disconnect now — sellers want more, and many buyers can afford to pay less,” Thompson said. “From conversations I’m having with clients, as well as anecdotal input I get from around the industry, I don’t see things picking back up without something changing to narrow this divide.”

David Zalman, senior chairman and CEO of Prosperity Bancshares in Houston, echoed that sentiment.

"Before you had the Ukraine-Russian war, our stock was trading about $75, $76 a share," Zalman said on the $38 billion-asset company’s recent earnings call. "We had negotiations and talks with several banks. We've continued those talks with the banks. However, [with] the stock price where it's at, it doesn't make a whole lot of sense."

The company’s stock has recently traded below $70 per share.

Robert Bolton, president of the bank investor Iron Bay Capital, said ramped-up regulatory scrutiny also has deterred dealmaking.

Under pressure from President Biden, federal regulators for the last several months have asked more questions and put up more hurdles to clear before signing off on proposed deals, according to bankers and M&A advisers.

At issue: Biden and other Democrats in Washington worry that allowing banks to become even bigger raises the chances that, if one were to fail, an even larger bank would need to absorb it. Such was the case in the aftermath of the financial crisis — a process that created a handful of megabanks and a greater concentration of risk in fewer companies.

But observers say this concern really does not apply to the community bank sector, where the bulk of dealmaking occurs. And yet, deal approvals at all levels are taking longer, Bolton said.

“I’ve talked with several community bankers in different parts of the country, and they all say the same thing: Things are drawn out, and they are getting drawn out for no particular reason that they can see,” Bolton said. “That creates a lot of uncertainty, and bankers don’t like getting into deals with uncertainty hanging over them.”

The result is a "pronounced pullback,” Bolton said.

Thompson agreed. In addition to buyers’ inability to meet sellers' asking price, regulators have imposed a slowdown. 

To be sure, some deals will still get announced this spring and summer. But they are expected to come at a relatively tepid overall pace, Thompson said. “The market’s been chilled.”