Banking and capital markets deals insights: 2021 outlook

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M&A activity consistently increasing

In the banking and capital markets sector, deal activity slumped in early 2020, both in volume and their reported size. Firms had more immediate concerns, starting with operational issues tied to the COVID-19 pandemic. Since then, we’ve seen activity in three main areas:

  • Mergers of equals
  • Commercial and Specialty finance
  • Mortgage (and related) companies

Some big highlights: the merger of First Citizens Bancshares and CIT Group Inc., PNC Financial Services Group, Inc’s (“PNC”) acquisition of Banco Bilbao Vizcaya Argentaria, S.A’s (“BBVA”) US business, acquisitions by mortgage technology and analytics firms Black Knight, Inc. and Intercontinental Exchange Inc. (“ICE”), and the IPO of the country’s largest home mortgage lender (Rocket Companies). Despite the economy’s clear challenges, there is still a lot of excess capital and liquidity that may be deployed in the coming year. Shifts in the mortgage industry could also lead to an active deal season.

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Deals 2021 outlook: M&A leads the economic recovery

PwC's Deals Sector Leader John Potter discusses the trends driving deals and outlook for 2021.

PwC's Deals Sector Leader John Potter discusses the trends driving deals and outlook for 2021.  Explore national deals trends.


2020 Activity

For the twelve month period ending mid-November 2020, the industry saw 71 deals announced with an aggregate value of $28.2bn, excluding the TD Ameritrade and E*TRADE transactions which we’ve classified as asset management deals. The merger of equals (“MoE”) strategy continued to be popular in 2020, most recently with the announced tie-up between First Citizens and CIT. The combined firm will create a top 20 US bank with over $100bn in assets. The deal announced in October and valued at $2.2bn, is expected to deliver more than 50% EPS accretion once cost savings are fully achieved. The banks are forecasting approximately $250m in expected cost synergies to be fully phased in by 2022, representing 10% of combined operating expenses We expect to see the continuation of the MoE trend as banks of a similar size seek to benefit from achievable synergies, including cost cutting opportunities and a reinvestment in technology.

In November, BBVA announced it agreed to sell its US business to PNC for $11.6bn. The deal will create the country’s fifth largest retail bank with more than $550bn in assets. The purchase price is estimated at 1.34x BBVA USA's tangible book value, based on its balance sheet as of Sept. 30, 2020, and reflects a deposit premium of 3.7%. PNC projects the deal to generate roughly 21% EPS accretion and about $900 million in anticipated cost savings to be realized by 2022. This transaction is expected to close mid 2021, pending regulatory approval. We expect to see continued divestment of US assets by global, non-US banks.

We’re also watching with interest a number of significant technology-related transactions focused on the mortgage market. Strictly speaking, these aren’t banking deals — but the lines are blurring more than ever. Along with Intercontinental Exchange’s (ICE) $11bn acquisition of Ellie Mae, we saw Fintech giant Black Knight’s announced acquisition of Optimal Blue, an online provider for the secondary mortgage market. We could still see additional deals as mortgage ecosystem providers look to add additional capabilities.


“We expect 2021 to continue to present challenges and uncertainty, however, we believe excess capital and liquidity and a shift in the mortgage industry could increase M&A activity over the next 12 months.”

Scott Carmelitano, US Banking & Capital Markets Deals Leader

Key deal drivers

Future of capital

The historically low interest rate environment continues to push many banks hard, as spread revenue has continued to drop. Meanwhile, the volatile equity markets have driven some deposits back into the industry, as depositors look for a safe haven. This trend has been especially challenging for the regional banks, which rely more on traditional loan portfolios than their larger rivals. In addition, the regional lenders continue to face pressure from national giants like JPMorgan Chase and Bank of America Corp, which continue to build deposits by deploying large marketing budgets, offering coast-to-coast branch networks, and promoting their strong technology and digital offerings.

As all the excess liquidity continues to weigh on margins for many firms, deals are an obvious solution. The MoE strategy could help institutions cut costs as the two parties involved in the transaction consolidate their branch networks, rationalize technology budgets, transform their businesses. In a prolonged low interest rate environment, many firms could view this as their road to higher profits.

Current bank stock valuations could also support deal activity in the coming year. Large and midcap banks are trading around 150% of tangible book value, while small-cap banks trade at roughly 110% of tangible book value. That spread could allow larger banks to use their stock currencies to acquire smaller institutions.

We’ve seen several large banks moving recently to enhance their wealth management service offerings, and this may continue in 2021. More banks could see value in diversifying toward a balance sheet that is more “asset light.” It’s one more way to cope with spread pressure, driving profitability through fee-based revenue that can be less volatile. 

Bank board rooms may also look to the divestiture markets as way to simplify their firms’ operating models and raise capital. Firms with non-core assets may find willing buyers who view an acquisition strategically, as with People’s United Bank’s agreement to sell its insurance agency to a fast-growing insurance brokerage firm.

Shifting industry paths

The Federal Reserve's actions earlier in 2020 to offset the economic hit from COVID-19, including slashing interest rates to near zero, has led to a gush of mortgage demand in the US, particularly from homeowners refinancing for lower rates. This has led some private, nonbank mortgage lenders to look to enter the public markets, amid a much broader surge of initial public offering activity that has also been helped by the Fed's actions.

Rocket Companies, the parent of Quicken Loans, was the first mover when it debuted on the New York Stock Exchange in the third quarter. Quicken is now the largest U.S. mortgage lender as measured by total originations. The recent trend of special purpose acquisition companies (SPACs) has also been a factor in the industry. United Wholesale Mortgage LLC, the second-largest home loan underwriter in 2019, combined with a SPAC in a $16bn deal that set a record for this type of transaction. Finance of America Equity Capital LLC, a nonbank mortgage lender backed by funds managed by an affiliate of The Blackstone Group Inc., has also entered into a SPAC deal that could close in early 2021.

Four other nonbank mortgage lenders — Guild Mortgage Company, Caliber Home Loans Inc., AmeriHome Inc. and LoanDepot — have filed IPO paperwork with the SEC. While recent market volatility has dampened the prospect for issuances in the near term, mortgage market's tailwinds are expected to continue for some time as interest rates are poised to remain at or near zero through 2023, creating increased demand for mortgage lenders. We could see additional consolidation here, perhaps even by newly public firms becoming vehicles to make further acquisitions in the industry.

There continues to be a lot of uncertainty around what 2021 will bring for the broader banking and capital markets landscape. Some banks may have undue exposure levels to certain industries, and we’ll watch trends for loan losses and write offs. The latest round of earnings calls cited banks lowering exposures to commercial retail and retail real estate borrowers, but there is likely more active portfolio management to come. In addition, the recent presidential election and new administration could lead to revised tax policies and regulation that could change the environment for mergers and acquisitions.

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Scott  Carmelitano

Scott Carmelitano

Banking and Capital Markets Deals Leader, PwC US

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