Bank mergers and acquisitions in doubt with tariff whiplash

Jim Lo Scalzo/Bloomberg

In a financial world that takes uncertainty harder than plain bad news, the rapid changes in U.S. tariff policy have brought banks — and the businesses they advise — to a standstill on dealmaking.

President Donald Trump's election last November spurred optimism that a confluence of deregulation and a favorable economic environment would lead to an uptick in mergers and acquisitions. But the recent shifts in trade policy, and the bewildering behavior of stock and bond markets, have sobered such hopes. 

Read more of American Banker's coverage of the Trump tariffs and their impacts on banks here. 

Financial institutions that were itching to consolidate have been forced to take a breath, while many banks are seeing already-tepid advisory businesses continue to stall out. 

"An environment where things are suddenly in question and you're not quite sure what the world's going to look like — it tends to cause a pause," said Brian Foran, managing director at Truist Securities. "It doesn't make deals impossible, but it just makes pulling the trigger that much harder."

Not only does the fear of uncertainty hold back businesses from making any big decisions, but the math for acquisitions isn't adding up. Trump's aggressive tariff stance has battered stocks, especially for banks, making equity less valuable to use in deals. The possibility of a recession has fueled concern for credit quality. 

Meanwhile, the Federal Reserve has signaled that it's too soon to tell where interest rates may go. And by Wednesday, markets had grown so panicked over the tariff upheaval that U.S. Treasury yields started to spike. Long-term rates have become unpredictable, making it even harder to measure the value of an acquisition.

"These kinds of wild swings and interest rates are a little tricky," Foran said. "If you're pricing a deal, and one of the key inputs is interest rates … it just makes it tough to get your arms around what you're buying."

Inter-bank dealmaking

Trump announced last week that he was imposing a tariff of at least 10% on all American trading partners. The tariffs went into effect on Saturday, with additional levies scheduled for four days later. On Wednesday, however, the president said through a social media post that he was pausing the tariffs against most of the other countries, with the exception of China, in which he stated the levy would be raised.

Stock markets reacted to both announcements. In the week following the initial executive order, the KBW Nasdaq bank index dropped by as much as 16%. The stocks recovered some after Wednesday's tariff rollback, then fell 7% by Thursday afternoon.

As a result, even the nation's largest bank has adopted a cautious posture on M&A deals.

"For a variety of reasons, we find it hard to imagine a sufficiently compelling large-scale acquisition at this time," CEO Jamie Dimon wrote in his recent letter to shareholders.

Smaller banks are feeling the chill as well. Dan Rollins is the CEO of Cadence Bank, which is based in Texas and Mississippi and has branches across nine states, mostly in the South. Earlier this year, Cadence reached a deal to acquire First Chatham Bank in Savannah, Georgia. But if the tariff chaos had been rocking the markets at that time, Rollins thinks the deal may have been put on hold — not by Cadence, but by FCB.

"If we had made a deal and then they turned around and watched the value drop 20% in a week's time, my guess is they would have said, 'Let's sit back and wait and see what happens with the market,'" Rollins said. "And we would have said, 'That's fine, we're happy to sit and take a break if you want to take a break.'"

Rollins emphasized that Cadence was interested in FCB for many reasons besides its stock value, so it still would have been interested in making the acquisition. But the tariff roller coaster might have forced them to hit the pause button.

"Clearly there's been a lot of volatility, and volatility causes people to do nothing," Rollins said. "It just raises a lot of questions, and questions typically slow things down."

Foran said banks' growing fears for the economy have been the most disruptive to the M&A scene.

"With tariffs, there's certainly a widespread expectation that the risk of recession is higher," he said. "If I'm trying to buy another lender, that just adds a whole other layer of uncertainty. … If it turns out to be a terrible cycle for Industry A, I probably just don't want to buy a bank that has exposure to Industry A."

M&A and investment banking

The factors that are making financial institutions hesitant to strike a deal are also tamping down M&A across other industries. But megabanks and regionals with investment banking units will feel the pressure of the depressed M&A market, as dealmaking income stays stagnant or drops off. 

Although the volatility of the past two weeks won't show up in first-quarter earnings, which banks begin reporting Friday, dealmaking advisory fees will likely still show business was tough, said Jeremy Swan, a managing partner at CohnReznick Advisory.

"When you look at the bank earnings on the investment banking side, I wouldn't expect to see any bright, shining lights from a positive perspective," Swan said. "Q1 activity was slow. It was slower than we've seen."

The fee income from M&A advisory services can provide a boost to balance out net interest income — for some of the megabanks, it can make up 10% of normalized profits, said Suryansh Sharma, a senior analyst at Morningstar. But he added that because it's a highly levered business, those revenues are quite cyclical, and the profits are even more so.

While expectations for investment banking had shot up after the election last year amid rumblings of animal spirits, "what we have seen is an M&A bust," Sharma said. In February, Bank of America CEO Brian Moynihan said he thought clients could handle the costs of inflation and tariffs, if they got the benefits of deregulation. 

Now, even deals that are in the pipeline will be a challenge to execute in the current environment, Sharma said. Swan said he's heard of a number of scheduled deals that in the last two weeks have been put on hold.

The uncertainty that has cropped up around taxes, tariffs and regulations "has reflected itself all up and down the yield curve," said Chris Stanley, who leads the banking practice at Moody's. The costs of borrowing haven't gone down, as once expected, and the dip in the markets has dashed the benefits of using stock to finance transactions.

"It's really hard to get a feeling of certainty in the current policy environment," Stanley said. "And that makes people not want to place bets." 

Banks could especially use the extra noninterest income now, as they continue to ride through tepid loan demand and still-costly deposits that have dragged on profits. Last year, investment banking fees, albeit not M&A, helped cushion the net interest margin mismatch. But other investment banking businesses, like initial public offerings and debt issuance, are facing a similarly dismal outlook, Stanley said. 

In the upcoming earnings reports, "what really would matter is hearing from banks on what their outlook is," Sharma said. "For some of these large banks, M&A could definitely impact profitability, but I think what would be more impactful is like their outlook on the economy."

Politics and policy

Trump tariff pause gives banks a reprieve, but threats remain

President Trump placed a 90-day pause on most of his sweeping tariff package, but for banks and other financial market participants, the threat of volatility remains.

By Kyle Campbell

April 9

A complicated picture

There are exceptions. Mike Bell, a lawyer at the Michigan law firm Honigman, advises credit unions on acquisitions of small to midsize community banks. Over the last week, he said, he's gotten more calls from banks looking to sell than ever before.

"Economic tumult, whether it affects you or not, is a little bit of a nudge," Bell said.

The reason, he theorized, is that while large banks have much to lose from seeing their stock value plummet, smaller lenders tend to be only lightly traded or not traded at all. Added to that, the kinds of families and institutional investors who own small banks may already be leaning toward selling.

"You want your equity event, you want to retire, you want to get something out of something you've held for years and years," Bell said. "This [tariff news] reminds you that that might be a wise decision."

Many bankers expect the hesitation to be a pause, not a full stop. Rollins, for one, believes the general direction of the industry over the past few decades has been toward more M&A, not less. And that momentum will continue, he said, even if the tariffs temporarily slow it down.

"The reasons behind that consolidation within the industry haven't changed," Rollins said. "The volatility just causes people to take a step back."

Swan said that within investment banking units, while M&A business is sluggish, it's possible the volatile market activity could be a boon for some megabanks with large trading desks. As brokers have been selling off en masse, those commissions could provide a bit of a pad for bank income. 

There can be opportunity in volatility for banks that are positioned adequately and have enough liquidity, Swan said, but even then, it's a challenge. JPMorgan Chase, Bank of America, Citigroup, Goldman Sachs and Morgan Stanley are projected to post their largest combined trading business results in at least seven years, according to data compiled by Bloomberg.

"There's a difference between what volatility is good for the business and what volatility is bad for the business," Sharma said, adding that a market crash has further consequences. "These banks are underwriting derivatives, and they have securities and investments on their balance sheet. [In a market crash,] the value of those could go down quite a bit, or they could take a lot of losses."