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Banking and capital markets deals insights: 2021 midyear outlook

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2:40

What's driving deals in 2021

PwC's Deals Sector Leader John Potter and other partners discuss the deals outlook for the rest of 2021.

Banking M&A rebounded in 2021 as dealmakers count on recovery 

The market saw a flurry of deal activity in the first half of 2021, signalling an intent by banks to capitalize on potential strategic and growth opportunities. 

Bank stocks are being viewed as an attractive investment opportunity by the market. Strong first quarter earnings on the back of reduced credit losses have helped propel bank indexes to outperform other industry comparisons. In addition, anticipated inflation could add fuel to an already hot deal market. We expect the consolidation of regional banks will continue as banks look to gain market share and/or footprint. With banks poised with strong stock prices to use as currency in deals, the outlook is positive for an increased number of deals.

Conversely, the larger multinational financial institutions will always strive to be leaner and more efficient and may look to spin off business units as their strategy changes. In this dynamic market, as companies reevaluate their holdings, there are ample opportunities to find buyers for an asset management unit or group of branches in a particular segment that no longer fit the plan.

Banks will have to continue to navigate their own growth story. The historic headwinds to profitability of compressed net interest margins from lower rates and lower demand for loans appears to be at a turning point. Meanwhile banks have developed an appetite for increased fee income in an effort to bolster earnings. The question often comes down to “where” to grow as much as to “who” to partner with in that growth.


2021 deal activity

The first half of 2021 saw 47 deals announced with an aggregate value of $31.6 billion. This compares to 25 announced deals and $6.8 billion during the first half of 2020 (excluding Morgan Stanley’s $13.1 billion acquisition of E*TRADE Financial Corp) which was negatively impacted by the emergence of the COVID-19 pandemic during the second quarter of 2020. During the period, we saw a number of regional bank tie-ups, including a trio of sizable transactions in April. These, along with the PNC/BBVA and Huntington/TCF deals from late last year, suggest that there is sustained appetite for mid-market consolidation at the right prices. Notable transactions in the period included:

M&T Bank & Peoples United (2/22/21) — $7.6 billion

  • The all-stock merger will result in a combined entity with $200 billion in assets and a network of more than 1,100 branches in the Northeast and Mid-Atlantic regions. M&T expects the transaction will be 10-12% accretive to M&T's EPS in 2023, reflecting estimated annual cost synergies of approximately $330 million.

Webster Financial & Sterling Bancorp (04/19/21) —- $5.1 billion

  • The two banks will combine in an all-stock merger of equals transaction with a total market value of approximately $10.3 billion. The parties expect the transaction to be accretive to earnings per share of both companies (roughly 20% and 10% to Webster and Sterling, respectively), after realizing $120 million of projected cost savings.

Bancorp South & Cadence Bank (04/12/21) — $2.8 billion

  • The two banks will combine in an all-stock merger of equals transaction with a total market value of approximately $6 billion.The parties expect approximately 17% accretion to each of BancorpSouth's and Cadence's earnings per share in 2022, after realizing $78 million of projected cost savings.

New York Community Bancorp, Inc. & Flagstar Bancorp, Inc. (04/26/21) — $2.6 billion

  • The two banks will combine in an all-stock transaction with a total market value of approximately $2.6 billion. The pro forma combined company will have approximately $87 billion in assets. The transaction is expected to be 16% accretive to NYCB's earnings per share in 2022, assuming $125 million of projected cost savings.

Notable BCM Deals Post 05/15/21

Old National Bancorp & First Midwest Bancorp, Inc. (06/01/21) — $6.5 billion

The two banks will combine in an all-stock transaction with a total market value of approximately $6.5 billion. The pro forma combined company will have approximately $45 billion in assets and $34 billion in deposits. The transaction is expected to be 22% accretive to Old National and 35% to First Midwest earnings per share in 2022, assuming $109 million of projected cost savings. 


"Bank stocks are being viewed as an attractive investment opportunity by the market. Strong first quarter earnings on the back of reduced credit losses have helped propel bank indexes to outperform other industry comparisons."

- Daniel Goerlich, BCM Deals Leader

Key deal drivers

The growth conundrum

After periods of underperformance since the financial crisis, bank stock indexes outperformed the S&P 500 during the first half of 2021.

Banks have been on the hunt for yield in recent years as record low interest rates have compressed net interest margins despite loan book growth. Now, as the US economy teeters on the edge of a period of inflation, banks are positioned to be one of the sectors that will benefit from anticipated rising interest rates.

Banks are also benefiting from precautionary measures taken in the second and third quarters of 2020, with recent earnings calls highlighting the release of loss reserves as the government assistance programs staved off the expected high volumes of credit losses.

There is likely still some apprehension surrounding bank stocks and their related values as some of the anticipated credit losses may still emerge as government stimulus begins to fade. However, recent performance as well the current market sentiment suggests the banking industry will continue to benefit from rising share prices and stock currency for dealmaking.

So what does this mean for deal volumes? With the industry poised to benefit from an inflationary environment and efficient balance sheets, we would expect the recent trend of bank consolidation to continue as banks look to build scale in an effort to capitalize on rising rates and strong market sentiment. Banks may also look to the acquisition of higher yield businesses and FinTech capabilities as a way of generating additional loan growth. 

Innovation and transformation

As the larger multinational financial institutions continue to strive for greater efficiencies we expect divestitures of certain non-core assets to continue, such as the recent sale of Wells Fargo Asset Management to a group of private equity sponsors.

In addition, we expect to see continued divestment of US assets by global, non-US banks whose strategy is aligned to other markets.One example of this trend: HSBC’s recent confirmation that it will exit US retail and small business banking to focus on wealth management and banking in the Asian market.

The convergence of traditional banking and financial technology will continue to be an underlying longer term strategy driving transactions.The pandemic highlighted the importance of digital banking and will likely continue to be a deal driver in 2021 and beyond as banks look to technology as a way to engage and retain customers.

With the recent rush of FinTech companies going public (Chime, Coinbase etc.) and the broader influx of capital into the space, banks may look to bolster their FinTech capabilities. This could result in the acquisition of tech firms as part of strategic fit or fuel further consolidation to drive synergies and the sharing of existing technology. 

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Dan Goerlich

Partner, PwC US

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