Expect issues like cybersecurity to influence more dealmaking

The American Banking Association has released its outlook for merger and acquisition activity in the banking sector in 2020.

The ABA finds that the forces contributing to the consolidation of the industry show little to no sign of dissipating. Larger banks have an advantage as they can spread the costs of things like cybersecurity and regulatory compliance over a more extensive asset base. That gives them a significant advantage over smaller banks. The numbers bear out that theory as larger banks, in aggregate, have higher returns on assets and equity than smaller institutions.

American Banking Association on Deals in 2020

The ABA does think that the continuing trend is going to impact M&A trends. The knowledge that smaller banks may have to sell is going to put a ceiling on acquisition multiples of assets and earnings. That ceiling is likely going to be lower than potential sellers are willing to accept.

The report concludes that “For 2020, we see neither a buyer’s market nor a seller’s market, but rather see an increasing value to investment bankers and other financial intermediaries who can serve as effective matchmakers in an increasingly segmented market.”

The combination of high levels of deal-making activity the past few years along with a meager number of de-novo banks means that pool of willing sellers may be shrinking, according to the Association. The banks that have survived the credit crisis and the past decade of rising compliance and technology costs may be earning a high enough return that they do not need to sell.

The ABA also finds that the older a bank is, the less likely they are to sell. Over the last 20 years, the number of banks in the United States has fallen by 50%. Digging deeper, the Association finds that the number of banks over 100 years old has risen over that time while the number of banks less than 20 years old has declined by 75%.

You can read the entire report here.

By Tim Melvin

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