Bank merger-and-acquisition announcements dropped during the second quarter and put 2022 deal activity on pace for one of the slowest years in recent history.
Banks inked 35 bank deals during the second quarter. That was down from 49 the prior quarter and well below the 66 transactions announced a year earlier, according to a Raymond James analysis.
At issue: ramped-up regulatory scrutiny following new
That began to dissuade deal conversations early in the year. Then inflation kicked into overdrive following Russia’s invasion of Ukraine — reaching a 30-year high in May — and galvanized Federal Reserve policymakers to ratchet up interest rates to rein in soaring prices. Recession fears have since mounted, given that soaring rates have historically stalled the U.S. economy.
Recessions typically hinder borrowers’ ability to repay loans, resulting in higher credit losses for banks. For acquisitive banks, the specter of recession makes it difficult to gauge the health of would-be sellers’ balance sheets and, as a result, many buyers have delayed M&A plans.
This is a stark contrast to 2021. As banks tried to build scale to invest in technology, talent and new markets, M&A activity surged in 2021 to 210 deals, up from 112 the prior year, according to S&P Global.
Through June of this year, however, there were just 84 announced deals. That puts the industry on track for a total of 168 across all of 2022, the second-weakest total since 2012 after only 2020, a year during which the coronavirus pandemic temporarily stalled dealmaking across industries.
“There is a lot of worry now that, if recession materializes, we’ll see the shoe drop on credit quality,” Jacob Thompson, a managing director of investment banking at Samco Capital Markets, said in an interview.
What’s more, bank stocks lost ground this year amid
“Maybe we’ve reached a bottom midyear, but we may plateau at a low level for a while,” Thompson said. Given the economic uncertainty and a looming mid-term national election that could shift the balance of political power in the nation’s capital, “we may see people on the sidelines for another six months or so, until things shake out and we have a better sense of the macro environment," Thompson said.
To better gauge industry activity between periods (as there are fewer banks each year because of M&A), Raymond James analysts said they examined the number of announced acquisitions in the second quarter as a percentage of the number of institutions at the beginning of the year. At 2.89% annualized, activity was below the 3.92% reported in the first quarter and below the 5.28% reported in the second quarter of last year, the analysts wrote in a report.
On a year-to-date basis, 3.50% annualized activity puts the industry on pace for the slowest M&A year since 2012 (3.36%), excluding 2020 (2.28%) when the pandemic outweighed other factors.
“We expect economic, regulatory and political uncertainty to weigh on M&A activity levels through year-end,” the Raymond James analysts added.
Robert Bolton, president of the bank investor Iron Bay Capital, agreed.
“Regulatory red tape seems to be in abundance,” Bolton said in an interview. “In conversations I’ve had with bankers, the regulatory issue is the biggest reason for the impasse.”
But he added that economic uncertainty and persistent pressure on bank stocks are clearly factors.
“When your stock takes a 20% punch in the face, in a manner of speaking, you step back and reconsider your options,” Bolton said.
More banks with excess capital will forgo M&A in the near term and either raise dividends or buy back their stocks while prices are at a discount, Bolton predicted.
“It’s going to take some time for M&A to shake out,” he said. “But at the moment, we’ve definitely hit a lull.”
