Merger and Acquisition (M&A) activity has traditionally been a large part of the banking industry. This changed significantly during the banking financial crisis, with significant bank closures beginning in 2008. There was momentous uncertainty in the economy, and M&A activity slowed dramatically. However, over the last few years M&A activity has steadily increased and according to Mark Olson, a former FED Board Governor, was poised to have a banner year in 2016.
Looking back at what actually happened in 2016, the number of completed mergers actually dropped in 2016 to 220 completed deals, down from 258 Bank mergers in 2015. This is very close to the number of mergers we expected when we wrote about Bank M&A in 2016 , where we projected 200 completed acquisitions during 2016. This can likely be attributed to the uncertainties in the economy and political environment during the last 6 months of 2016. While the number of mergers decreased, the trend of banks with total assets less than $500MM being the majority of acquired banks continued. Over the last 7 years, 81% of acquired banks were less than $500MM in assets.
Looking forward at 2017, there is a great deal of optimism for the banking sector as a whole. The potential for interest rates to finally increase meaningfully should have a positive impact on bank earnings. Continued strong jobs growth signals the economy is poised for growth in 2017. Also, the possibility of less regulatory burdens under the new administration has had a big impact on bank valuations.
This optimism in the industry could impact merger activity in different ways. As valuations rise, more banks are going to find the idea of being acquired appealing. However, as profitability increases and regulation becomes less burdensome, smaller banks may find it no longer necessary to merge or be acquired. These two forces will be competing with each other over the next 12 – 18 months. Depending on which thinking prevails, M&A growth in the sector could strengthen or remain flat.
Our current estimation is that M&A activity will be relatively stable in 2017, with around 200 deals completed. Considering the complexity and time required to complete a merger between banks, there would need to be a significant number of executed agreements in place relatively soon to have growth in M&A activity in 2017. Looking at the number of pending merger deals in place as of the time of this writing (81), it will be difficult for the sector to complete more than last year’s 220 deals. That being said, if the economy continues to improve and regulatory burdens do ease, it could be a banner year for bank profitability. This in turn could make 2018 the “year of the merger”.