Robust M&A pace expected to continue in 2022

When it comes to mergers and acquisitions, 2021 was a year for the record books—literally. Globally, there was a staggering $5.6 trillion in M&A deals. That volume was well ahead of the previous high of $4.4 trillion that occurred in 2007. Deal making across industries was spurred by a combination of factors, including abundant liquidity, historically low capital costs and pent-up demand following the pandemic-related slowdown in 2020.

Banking’s banner year

Merger and acquisition deals have been surging across industries from technology to transportation, and financials have certainly been riding that same wave. According to S&P Global Market Intelligence, the volume of U.S. bank M&A transactions jumped to a 15-year high in 2021, and analysts are anticipating another robust year of deal making in 2022. Although the number of deals was down compared to pre-pandemic levels at 208 completed versus 255 in 2019, aggregate deal value of $77.58 billion was significantly higher than the $55.05 billion two years prior, according to S&P Global.

Taking a closer look at the drivers behind transactions provides further insight into what to expect in the coming year. The simple explanation is that banks and credit unions are feeling more pressure to grow. Acquiring another financial institution can be a pathway to increase market share and expand into new geographic markets, as well as acquiring or expanding products and services, business lines, technology and talent. Growth also is being fueled by competition from fintechs, which is putting more pressure on FIs to invest in their own mobile and digital banking platforms. For many financial institutions, strategic M&A growth brings cost efficiencies, such as being able to spread investment in technology across a larger footprint.

“One of the key things that you’ve heard for years and years is that scale matters, and I think that is even more prevalent today in a world where we’re all combatting low interest rates, massive amounts of excess liquidity and working to get more efficient,” said S&P Global Market Intelligence Principal Analyst Nathan Stovall in an ABA Banking Journal podcast on the Bank M&A Outlook for 2022. “At the same time, we’ve had a changing customer who demands better technology, easier to use technology, and we’ve had many new non-bank entrants enter the space to offer a lot of those products. You put all of that together, and it’s really a cocktail that says, ‘I want to look to do deals in order to remain relevant, compete effectively and be able to grow earnings in a challenging revenue environment.’”

Hungry for growth

According to the Bank Director’s 2022 Bank M&A Survey, 58% of respondents said they are open to do acquisitions, although their primary focus is on organic growth. Twenty-seven percent of the senior executives and board members surveyed said they want to be active acquirers, while 15% said M&A is an unlikely growth path for their bank. The two primary factors that respondents cited that make M&A an important piece of their institution’s growth strategy are scale to drive technology and other investments at 52% and geographic expansion at 42%.

Some large M&A deals made headlines in 2021, such as BMO Financial Group’s acquisition of Bank of the West for a reported $16.3 billion. Mid-market banks have been active as they look to accelerate growth to better compete with the large national financial institutions. The community bank sector also has seen a number of deal announcements over the past year. For example, the $750 million Iowa State Bank signed an agreement to acquire the smaller $73 million Iowa Prairie Bank in Brunsville, Iowa. The merger, which was expected to close in fourth quarter 2021, will expand Iowa State Bank’s service area in northwest Iowa to 13 branch locations.

In some cases, acquisitions are a classic example of a big fish gobbling up a smaller competitor. There also has been a trend of “mergers of equals” – two FIs combining resources to create a new, stronger entity that is better positioned for growth. Credit unions also have been on a buying streak. For example, the Birmingham Business Journal reported in December that Birmingham-based Avadian Credit Union agreed to buy Citizens State Bank, a two-location, $85 million-asset community bank based in Vernon, Ala. The article noted that the deal represents the thirteenth acquisition of a bank by a credit union in 2021, which is twice the volume of 2020, but below the 16 deals inked in 2019. 

Challenges could surface

The bank M&A landscape does face some potential headwinds in the coming year, including concerns about greater regulatory scrutiny. Last July, the Biden Administration announced a review of anti-trust policy, with a specific mention of the Bank Merger Act of 1960. In December, Maxine Waters, chair of the House Financial Services Committee, called for a moratorium on deals that resulted in a bank having over $100 billion in total assets. Mega-deals such as U.S. Bancorp’s proposed acquisition of MUFG Union Bank is certainly putting bigger deals on the radar of policy makers and regulators. In the near term, concerns about more oversight on bank M&A deals could end up accelerating activity, pulling deals forward in case more restrictions or tighter scrutiny does come into play later in the year.

Yet those potential obstacles have not put a damper on forecasts for another strong year of M&A activity in the coming year. A number of industry analysts and ratings agencies are predicting a similar pace of bank M&A deals in 2022. A 2022 Banking and Capital Markets Outlook published by Deloitte projected the number of closed M&A transactions for 2021 slightly lower than S&P Global at $63 billion, and they expect that steady pace to continue in 2022 with a forecast of $60 billion in deals for 2022. According to Deloitte, while small banks with assets under $10 billion may continue to be targets, there likely will be an increase in merger-of-equals within the $10 billion and $50 billion midsize bank category. Larger midsize banks with $50 billion to $100 billion in assets could look at acquisitions of smaller banks to grow specialized businesses, expand into new geographies and add new customer portfolios.

Fitch Ratings also recently published an outlook on bank M&A activity that said, “heightened political and regulatory scrutiny of large bank mergers and acquisitions could lead to increased execution risk for future deals and for banks with in-process transactions. However, we expect small and mid-sized regional banks to continue to announce new deals despite growing regulatory scrutiny that could result in delayed closings or even the potential termination of deals.”

Another hurdle FIs need to be aware of is that the surge of activity is resulting in a bit of logjam of deals that is slowing approvals. Large transactions in particular are taking longer to close. Those entering into deals in 2022 may need to be patient or account for longer closing times.