In this expanded 2023 Mid-Year Review edition of The M&A Monitor, we examine the full spectrum of bank M&A activity through the first half of 2023 (“1H 2023”) including deal volume; pricing and valuation trends; deal drivers; geographic differences; and the outlook for the remainder of the year. Additionally, we will be hosting a webinar on July 26th at 2:30pm ET to discuss current conditions in the bank M&A marketplace.
Without question, M&A in the banking industry was sluggish in 1H 2023. While the languid pace of dealmaking can be attributed to a variety of factors, there is one primary culprit: the fastest increase in the federal funds rate in more than 40 years and the ripple effects thereof.
Indeed, rate increases resulted in significant unrealized securities losses for many banks, creating a bid/ask spread between buyers and sellers. Separately, deposit costs accelerated sharply, if belatedly. The ensuing funding and margin challenges hindered dealmaking and swung the pendulum of optimal acquisition targets away from loan generators toward deposit-rich franchises. Meanwhile, the failures of Silicon Valley Bank et al. – which were fueled, in part, by the circumstances above – triggered a sharp selloff in bank stocks that hampered the dealmaking efforts of those would-be acquirors that use stock as deal currency.
Deal pricing proved somewhat resilient, if lower than in prior periods. Albeit derived from a limited sample and skewed by the absence of non-public deal terms, the median price-to-tangible book and price-to-earnings (LTM) multiples in 1H 2023 were 1.36x and 11.3x, respectively, 12% and 22% lower than in 1H 2022.
Looking ahead and with history as a guide, the banking industry now appears poised for a period of outsized consolidation as the underlying forces driving bank M&A in recent years – if not decades – all largely still hold and have, in fact, been exacerbated. Deal discussions will especially gain momentum as the endgame for the FOMC’s tightening cycle comes into focus, as clarity on the economic outlook emerges, and if and as bank stocks rebound to more-customary valuation levels.
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