NEW YORK--(BUSINESS WIRE)--A new survey conducted by Keefe, Bruyette & Woods finds that despite the impact of a volatile operating environment, the majority of bank executives expect M&A to accelerate over the next 18 months. According to the 2017 KBW Bank M&A Survey of 137 regional bank CEOs, CFOs and board members, 64 percent indicate that they expect increased M&A activity, driven mostly by smaller transactions, and three-quarters identify themselves as potential buyers in these market conditions.
The Outlook for M&A
Ranking reasons why M&A activity will accelerate, bank executives named the pressure on deposits as interest rates rise as the top reason (74%), followed by the closing of bid/ask spreads in M&A negotiations (68%) and political and economic uncertainty (57%).
Conversely, respondents think that the top challenges that could possibly slow the pace of consolidation include:
- Potential corporate tax reform and its positive impact on bank profitability (78%)
- Bid/ask spreads remain too wide as smaller banks expect higher take-out prices (70%)
- Higher interest rates increase profitability for the banking sector, driving more companies to remain independent (70%)
Overall, the survey shows an increase in respondents who identify themselves as buyers (75% versus 71% in 2016), as higher currencies from the stock market rally have made the financial aspect of M&A moderately more attractive.
When asked how the election influenced bank executives’ M&A views, 60 percent of respondents stated that it had no impact. However, 31 percent also said that, after the election, they were more likely to be buyers. Within the banking sector, mid- and large-cap banks have seen the greatest stock appreciation when compared with smaller banks since the election. Large regional banks, which have assets between $50 and $500 billion, have seen a 29 percent increase in their price-to-tangible-book-value (P/TBV) multiple since 3Q16, while banks below $50 billion saw an increase of approximately 18 percent during the same period.
“When analyzing the responses from our 2017 survey, it becomes fairly obvious to us that most SMID-cap banks continue to view themselves as potential buyers even in the face of higher take-out prices,” says Michael Perito, Director at Keefe, Bruyette & Woods. “However, the gains in bank stocks were not equal. The gap in gains between large regionals and their smaller counterparts permit large regionals to pay higher take-out prices while still committing to the tangible book value earn-back they promise to investors.”
When asked about pricing expectations, nearly 60 percent of respondents indicated that sellers’ expectations have increased more than 10 percent post-election, although targeted deal metrics appear largely unchanged, with higher valuations for buyers helping to bridge the gap as expectations rise.
Cautious Optimism As Deal Fundamentals Remain The Same
While there continues to be growing consensus that short-term interest rates will rise, bank executives revealed in the survey that they have mixed thoughts when it comes to the impact of higher rates. Half of the respondents expect more M&A activity, but the other half expects no impact or less M&A activity.
The study also revealed that 44 percent of bank executives expect an additional two rate hikes in fed funds in 2017. 26 percent are more conservative and have budgeted for zero additional hikes this year.
Another important consideration for bank executives when it comes to increased M&A activity is the tangible book value (TBV) dilution that occurs when a deal is made. In the post-election market, the majority of bank executives revealed that the acceptable range for TBV earn-back is between one and four years, with 24 percent saying that five years is acceptable. Even though the reality of higher prices has taken hold, 90 percent of executives said the post-election market has not changed their TBV earn-back expectations and they are staying true to their promise of protecting shareholder value.
Focus on Consolidators
This year, KBW has focused on seven investment ideas that are fundamentally attractive, but that also appear best positioned to benefit from a potential pick-up in consolidation activity over the next 18 months.
“Our 2017 bank M&A survey confirmed many of our prior views,” continued Perito. “While there are items such as political and regulatory uncertainty that could temper enthusiasm, the results of this survey point to a continued high pace of consolidation. As a result, a handful of regional banks are best suited to take advantage of this opportunity.”
For more information and to review this year’s seven investment ideas, see the full report, “2017 Bank M&A Survey: Rising Prices Not Likely to Slow Consolidation,” published on May 23, 2017.
KBW (Keefe, Bruyette & Woods, Inc., operating in the U.S., and Stifel Nicolaus Europe Limited, also trading as Keefe, Bruyette & Woods Europe, operating in Europe) is a Stifel company. Over the years, KBW has established itself as a leading authority in the banking, insurance, brokerage, asset management, mortgage banking and specialty finance sectors. Founded in 1962, the firm maintains industry-leading positions in the areas of research, capital raising, mergers and acquisitions, and sales and trading for financial services companies.