2017 Bank M&A Performance

2017 ended with 263 bank and thrift transactions, in-line with 2016’s number of deals at 250. With the lack of denovo activity increasing or maintaining the number of banks, it is unlikely the number of M&A transactions will continue to decrease over time.

Although many industry prognosticators say “banks are sold, not bought”, it is difficult or impossible to sell an entity that does not have earnings, market-share, customer niche, a system someone wants or personnel someone wants. These are the five aspects of a company that entices a buyer to be interested and/or pay a premium. Acquirers buy to increase earnings whether it is directly or indirectly. Unless we return to a world of “irrational exuberance” (Alan Greenspan Dec 5 1996) where banks start offering ridiculous prices of 3x to 4x book value and 35+x earnings, then I would agree companies are sold and not bought. The supply of sellers is in the 1,000’s. Many of the smaller institutions’ executive staff and board of directors have survived the crisis and are 10 years older; they are looking to exit. But the industry and economy has changed considerably from pre-crisis. Banks and thrifts have an increased cost burden due to compliance mandates, reduced lending capability due to underwriting regulations, new risks to deal with (including cyber-security) and a social shift in how people use banking services. The five aspects above will drastically limit the sale-ability of the 1,000’s of financial institutions contemplating sale.

Having painted a negative view there is some good news in the numbers. With a scarcity of viable targets and no new banks entering the system the economic laws of supply and demand are driving prices up. 2017 saw price-to-book multiples increase to almost 1.6x on average from 1.3x as it was in 2014, 2015 and 2016.