No matter what the industry, companies are sometimes compelled to join forces with the intent of gaining financial strength and market presence. Indeed, in 2019 alone, there were over 49,300 mergers and acquisitions worldwide according to the Institute for Mergers, Acquisitions and Alliances. While M&As slid in 2020 — for obvious reasons — they nonetheless maintained a robust pace at a shade under 44,930.
Furthermore, experts anticipate M&As to ramp up in 2021, and they could be especially commonplace within one sector in particular: banking.
As reported by Barron's, bank mergers are expected to proliferate among regional and community banks over the next 12 months as smaller financial institutions aim to give large FIs a run for their money.
"Bank mergers are expected to proliferate among regional and community banks over the next 12 months."
Indeed, within mere weeks of the New Year, their prediction proved to be true. New deals included Columbus, Ohio-based Huntington Bancshares acquiring Detroit's TCF Financial for $6 billion. This was preceded in Q4 by First Citizens Bancshares (Raleigh, North Carolina) combining with CIT Group (New York City) as well as PNC Financial Services (Pittsburgh) joining forces with BBVA USA (Birmingham, Alabama).
Following the leaders
The surge in mergers among smaller banks can in part be chalked up to major players in the banking space also uniting. In 2019, for instance, Charlotte, North Carolina-headquartered Branch Banking and Trust & Co. allied with Atlanta-based SunTrust. The result, Truist Financial Corporation, makes the super FI the sixth-largest lender in America.
Tom Michaud, CEO of Keefe, Bruyette & Woods, told Barron's that the $28 billion deal between the super-regional FIs was struck so they could more effectively compete with JPMorgan Chase, Citigroup, Wells Fargo and Bank of America, otherwise known as the "Big Four."
"If they wanted to be relevant and significant … they needed to be able to stand up against the Big Four," Michaud explained.
M&As have been the lay of the land among FIs for decades. According to Robert Kafafian of The Kafafian Group, which is located in Bethlehem, Pennsylvania, his firm has been involved in over 60 mergers in the past 20 years in 40 different states. Taken together, those 60 acquisitions combined a total of 500 companies. Speaking to American Banker, Kafafian noted that much like the novel coronavirus expedited digital transformation, recent forced changes to how community banks operate are taking root. Specifically, many organizations now require less of a physical footprint than they did pre-pandemic.
"Customers have shown they can adapt to changing technology," Kafafian explained. "Adoption may have advanced three to five years faster than what it might have been otherwise without the pandemic. Tech capability is all the more important now. The partnerships that banks view as most important will include fintechs that they can utilize to better connect to their customers."
Community banks filling the vacuum left by large FIs
Another issue that appears to be contributing to the growth in mergers among regional and community banks is the fragmentation of FIs, Kafafian told American Banker. The Big Four institutions are devoting much of their time and attention to businesses and consumers operating or living in urban areas, creating a void in local financial services for families and small businesses located in rural climes. Smaller banks are filling the resultant vacuum by combining their operations, which allows them to better serve the needs of those customers residing outside of metropolitan areas.
"Predictions for an uptick in bank consolidation aren't exclusive to the United States."
Notably, predictions for an uptick in bank consolidation aren't exclusive to the United States. According to ING, countries like Austria, Italy, France and Spain have historically had high numbers of bank branches per million residents. However, due to the adverse profitability effects of COVID-19, more FIs throughout the Eurozone — a region that was already overbanked — are unifying to reduce expenses and increase overall operational efficiency. They're also pairing up to better compete with banks in the U.S. and China, which maintain a higher average return on capital comparatively speaking and have invested more heavily in technology platforms as well as data analysis, The Economist reported.
How much will mergers and acquisitions accelerate in the banking space in 2021? Thanks in part to the COVID-19 vaccines now in distribution mode throughout the United States (more than 23 million shots have been administered in the U.S. as of Jan. 25, according to Bloomberg), COVID-19 is unlikely to be the obstacle that it was in 2020.
"There are a lot more merger-of-equals talks going on now than there has ever been," Kafafian told American Banker. "People are saying we need to get bigger, faster. If we are two $2 billion-asset banks, we need to get together and be a $4 billion-asset bank. And on up."
At BranchServ, we're equipped to handle your physical, electronic and automation needs no matter what your size, and we have a tremendous amount of experience managing the branch transitions that come with M&A. Both our asset tagging and decommissioning programs have specifically been developed to help address the needs of institutions as they grow and change through mergers. Contact us today to learn more about these and our other resources.