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How Bank M&A Mirrors 2020 Shale Oil: All-Stock Offers and Small Premiums

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Challenges Ahead for Banking Mergers and Acquisitions in the US

Treasury Secretary Janet Yellen has indicated that the US may see more banking mergers and acquisitions soon. However, some areas of the Wall Street are skeptical, considering recent failures and rescues that resulted from portfolio devaluation and shifts in deposits.

Possible Outcomes

Don Bilson, the head of event-driven research at Gordon Haskett, suggests a wave of all-stock deals in the banking industry with modest premiums, similar to what was seen with US shale oil industry deals in Q3 2020. Investors who pick the right bank before the merger will likely earn only in stock. The premium would most likely be small, states Bilson.

Hurdles to Overcome

The pessimism around banking deals might also stem from Treasury Secretary Yellen’s recent statement about a possible decrease in earnings for banks when they release their Q2 earnings next month. This dip in earnings is already reflected in many banks' “mid-single digit forward EPS multiples,” according to Bilson. There are additional obstacles standing in the way of bank deals, states Bank of America (BofA) analysts led by Ebrahim Poonawala. Regulators are taking too long to approve deals, and MTM accounting is damaging bank assets when interest rates are "higher for longer."

Regulatory Challenges

Furthermore, the Department of Justice and the Federal Trade Commission are not keen on the idea of industry consolidation. BofA states that the MTM accounting requirement has made it tough for potential buyers to pursue merger and acquisition deals, given the immediate decline in capital ratios.

The Bottom Line

Investors are unlikely to profit significantly if more banks merge in the coming months since modest premiums and all-stock deals are expected. A decrease in bank earnings and regulatory hurdles are additional challenges facing the banking industry. However, if a merger does occur, it will significantly shape the future of banking in the US.
In conclusion, the challenges and regulatory hurdles facing the banking industry in the US could have an impact on new businesses that are attempting to enter the market. With mergers and acquisitions becoming more common, it's important for new businesses to stay up-to-date on the latest industry news and trends. Investors may not profit significantly from these mergers, but for new businesses looking to partner with a bank or financial institution, these mergers could provide opportunities for growth and expansion.

However, new businesses should also be aware of the potential risks of partnering with a bank that is undergoing a merger or acquisition. Regulators are taking longer to approve deals, and MTM accounting is damaging bank assets when interest rates are "higher for longer." Therefore, it's important for new businesses to carefully evaluate the potential benefits and risks of such partnerships.

Overall, the banking industry in the US is facing significant challenges and regulatory hurdles, which could impact both investors and new businesses. However, by staying informed and aware of these challenges, businesses can position themselves to take advantage of potential opportunities for growth and expansion.

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