Even banks that aren’t part of the merger bonanza can expect to see positive effects from a wave of consolidation.
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After a relatively dormant 2020, Wall Street expects a surge of bank mergers this year.
The economic impact of the coronavirus pandemic dampened much of the expected merger activity for 2020—even as it served to intensify the rationale for why banks should combine. Last year, amid the worry over low interest rates and potentially ballooning loan losses, banks were busy navigating through their own issues and less interested in acquiring banks that could potentially bring their own set of problems. But with many of the worst-case scenarios for the economy thankfully avoided, banks are coming out of the crisis feeling a renewed pressure to become more efficient.
At the end of 2019, following the announced merger between BB&T and SunTrust to create Truist Financial (ticker: TFC), many expected that a wave of mergers would soon follow. Interest rates were low by historical standards and the sector was facing competition from fintech players like PayPal Holdings (PYPL) and Square (SQ). Now, in 2021, interest rates are even lower and banks have had to rethink their digital game amid lockdowns spurred by the pandemic.
“There was a need for bank consolidation pre-COVID and that need has only been amplified given today’s new environment,” Brady Gailey, managing director at Keefe, Bruyette & Woods, wrote in a note Wednesday. He added that consolidation will also help banks improve returns and offset weak organic loan growth.
In figuring out which banks would make for potential buyers and which may be sellers, KBW often rates banks according to their price to tangible book value. Banks with higher P/TBV can use their steeper valuation to buy a lower P/TBV target. The bank identified 53 potential acquirers in its coverage universe of 223 banks and found that the median P/TBV was 1.8 times and that the banks were trading at 14.1 times expected 2022 earnings.
Among the Outperform-rated names for the potential acquirers were Prosperity Bancshares (PB), Ameris Bancorp (ABCB), Pacific Premier Bancorp (PPBI), United Community Banks (UCBI), Independent Bank Group (IBTX), First Interstate BancSystem (FIBK), First Busey (BUSE), Veritex Holdings (VBTX), Independent Bank (INDB), and First Bancshares (FBMS).
Banks that could be potential targets had a median P/TBV of 1.2 times and were trading at 13.5 times protected 2022 earnings. Of the potential sellers, KBW rates Cadence Bancorporation (CADE), CBTX (CBTX), and First Western Financial (MYFW) Outperform.
The wider the spread of P/TBV is between potential acquirers and potential targets, the more bullish the prospects for M&A are, Gailey wrote.
KBW also expects there will be mergers of equals, with Outperform-rated Synovus Financial (SNV), Ameris, United Community, Independent Bank Group, Home Bancshares (HOMB), Sandy Spring Bancorp (SASR), and First Busey being potential candidates.
But even banks that aren’t part of the merger bonanza can expect to see positive effects from a wave of consolidation. “We also believe in general that higher levels of bank M&A will act as a positive catalyst for the group, which could push group valuations higher,” Gailey wrote.
The KBW Bank Index was down 0.6% in recent trading, while the S&P 500 was up 0.2%.
Write to Carleton English at [email protected]
