Bank merger-and-acquisition activity is poised to bounce back in 2024 — or is it?
After a two-year lull, during which deal volumes slowed to a crawl amid pervasive economic doubts, bankers and analysts entered 2024 with high expectations for a resurgence. They pointed to the ever-mounting need for scale and diversity in an era of fierce competition and escalating technology costs. They also noted the U.S. employment market’s enduring strength — it posted six-figure job gains every month last year and again in January and February — and said it had effectively countered the adverse impacts of a surge in interest rates.
Fears of credit quality deterioration had eased, and bank stocks, often the currency used to pay for acquisitions, had begun to recover from a rough 2023.
Conditions, the bullish M&A argument went, were ripe for the unleashing of pent-up demand.
“Everyone was worried about the economy, but it’s hard to see a big slowdown anywhere on the horizon right now, given the job growth,” said Mike Matousek, head trader at U.S. Global Investors. “I’m not saying there are no concerns, but nothing seems to be derailing this economy, and that does not bode well for more dealmaking.”
It would mark a stark reversal from the doldrums of the past two years.
Banks announced only 99 deals in 2023, according to data from S&P Global Market Intelligence. That was far below the 157 in 2022, which was hardly a banner year for M&A. It fell far short of the 202 transactions inked in 2021, when activity rebounded from the temporary pause imposed by the pandemic. The 112 total in 2020, when COVID-19 paralyzed vast swaths of the economy, was still higher than last year.
In the same span, the S&P data showed, the aggregate disclosed deal value plunged to $4.2 billion last year from nearly $9 billion in 2022 and $77 billion in 2021, when several large deals were announced.
Through the first two months of 2024, meanwhile, acquisitive banks announced 20 deals, putting the industry on pace for 120 transactions this year — more than last year yet hardly strong momentum.
Total U.S. M&A deal value across all sectors totaled $1.3 trillion in 2023, down nearly 50% from 2022 and the lowest level since 2010, according to KPMG. Carole Streicher, head of deal advisory and strategy for the firm, said 2023 “was a very weak year for M&A.” Deal talks were on the rise early in 2024, but ultimately, much depends on the interest rate environment, she added.
While the economy and the banking industry as a whole weathered a storm of interest expense spikes between 2022 and last year as the Federal Reserve sought to combat inflation, policymakers continue to delay a shift to lower rates.
They cited an inflation rate that, while far from its 2022 peak of 9.1%, continues to hover above 3%. That is more than a percentage point above the level that Fed officials say is healthy.
“We are waiting to become more confident that inflation is moving sustainably down to 2%,” Fed Chair Jerome Powell said before the Senate Banking Committee in March. “When we do get that confidence, and we’re not far from it, it will be appropriate to begin to dial back the level of restriction so that we don’t drive the economy into recession.”
Powell’s statement spurred fresh futures market bets on initial rate cuts in June or July. But Matousek noted that investors have awaited reductions for about a year. Powell’s outlook, he said, hardly cements a move to lower rates this summer.
“Predicting the Fed’s next step is a fool’s game,” Matousek said. “I don’t think there’s any assurance of rate cuts this summer, and if we do see that, the process could be long, slow and gradual. “Uncertainty tends to accompany that kind of process, and that can have side effects for things like M&A. So there are bullish and bearish factors at play for deals,” he added.
Against that mixed backdrop, here are four impediments that may prevent an M&A rebound.
Jim Dobbs
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