Pessimists about bank M&A cite pricing, capital constraints

Two out of every three bank executives and directors surveyed recently believe their bank needs to grow significantly in order to compete in today’s market, but how will they do that? Clearly, many banks expect to grow through acquisitions.

Fifty-one percent of bankers and board members surveyed in the 2016 Bank M&A Survey by Bank Director and Crowe Horwath LLP reported their banks intend to make a purchase in the next 12 months. And bankers largely are optimistic about the current deal environment, with nearly two-thirds of bank executives and directors saying it’s more favorable to bank M&A activity than a year earlier.

But there are pessimists in the crowd who see a worse environment for M&A, and they largely point to deal pricing, capital constraints and a lack of sellers as drivers.

One of every 12 bankers and board members surveyed, or 8 percent, see the deal environment as less favorable. That’s up from 1 of every 20 respondents in the 2015 survey (5 percent) who considered the M&A scene to be less favorable.

Asked why these respondents considered the deal environment less favorable, 59 percent said pricing is too low for potential sellers. Nearly half (47 percent) cited capital constraints, and 41 percent said banks don’t want to sell. Each of these categories had larger shares of respondents citing them this year than last year.

Less popular answers this year were that regulators are less likely to approve deals (12 percent of respondents) and that stock valuations are not at pre-crisis levels (12 percent). Each of those answers garnered a larger share of votes in last year’s survey.

It’s unclear whether the share of survey respondents who aren’t as enthusiastic about the deal environment see their bank as potential buyers or sellers, but it’s apparent that deals are part of the regular board agenda at many banks. Thirty-percent of respondents said their boards discuss either a possible sale or acquisition regularly.

Banks that optimize their capital have more freedom to grow by reaching new markets through expansion or acquisition. They also have more freedom to grow through launching new products. Banks that aren’t struggling with managing capital adequacy can devote attention and resources to using capital most effectively – whether that includes a deal or whether it involves organic growth.

As Peter Brown, director of strategy and operations for the financial institutions division at Sageworks has said, the most important benefit of optimizing capital is that it provides financial institutions with the ability to quickly move capital where the need is critical.

“Relieving pressure on capital creates an institution that is more flexible and agile, more competitive, and better prepared for changes on the horizon,” Brown says. Institutions that are able to meet these challenges ultimately have the flexibility and financial ability to focus on the products and services that will best meet the needs of their customers and communities.

The challenge is that optimizing capital requires overcoming an assortment of internal and external pressures, including the interest rate environment, a changing regulatory and accounting landscape and disconnected processes at the institution that make it more difficult to manage risk.

For more on how institutions can reduce the impact of capital challenges and more effecitvely deploy capital, download this whitepaper, “Optimizing Capital – Challenges and Opportunities.”