After a relatively dormant 2020, Wall Street expects a wave of bank mergers this year.
The economic impact of the coronavirus pandemic has dampened much of the merger activity expected for 2020, even though it has served to intensify the reasons why banks should combine. Last year, amid concerns over low interest rates and the potential increase in loan losses, banks were busy solving their own problems and less interested in acquiring banks that could create their own set of problems. But with many of the worst-case scenarios for the economy thankfully averted, banks are emerging from the crisis under renewed pressure to become more efficient.
End of 2019, following the announced merger between
and SunTrust to create
(ticker: TFC), many expected a wave of mergers to follow soon. Interest rates were low by historical standards and the industry faced competition from fintech players like
(SQ). Now, in 2021, interest rates are even lower and banks have had to rethink their digital game amid lockdowns spurred by the pandemic.
“There was a need for bank consolidation before COVID and this need has was only amplified in today’s new environmentBrady Gailey, Managing Director of Keefe, Bruyette & Woods, wrote in a note on Wednesday. He added that the consolidation will also help banks improve yields and offset weak organic loan growth.
To determine which banks would be potential buyers and which could be sellers, KBW often assesses banks based on their price against their tangible book value. Banks with a higher P / TBV can use their higher valuation to buy a lower target P / TBV. The bank identified 53 potential acquirers in its coverage universe of 223 banks and found that the median P / TBV was 1.8 times and banks were trading at 14.1 times expected earnings in 2022.
Among the top-rated names for potential buyers were
Pacific Premier Bancorp
United community banks
Independent banking group
Premier BancSystem Interstate
Banks that could be potential targets had a median P / TBV of 1.2 times and were trading at 13.5 times the protected earnings of 2022. Among potential sellers, KBW rates
Western Financial Premier
The wider the P / TBV gap between potential acquirers and potential targets, the more optimistic the outlook for mergers and acquisitions, Gailey wrote.
KBW also expects there to be peer-to-peer mergers, with an outperformance rating
(SNV), Ameris, United Community,
Independent banking group
Sandy Spring Bancorp
(SASR) and First Busey being potential candidates.
But even banks that aren’t part of the merger windfall can expect to see the positive effects of a wave of consolidation. “We also generally believe that higher levels of bank mergers and acquisitions will act as a positive catalyst for the group, which could push up the valuations of the group,” Gailey wrote.
was down 0.6% in recent trade, while the
was up 0.2%.
Write to Carleton English at [email protected]