Banking and capital markets: US Deals 2023 outlook

Bank dealmaking during uncertainty

The Federal Reserve’s rapid interest rate hikes are a double-edged sword for financial institutions. For many, it will increase earnings-asset yields and lending margins, but it’s also raising recessionary fears, forcing the industry to allocate capital with greater discipline. Fewer bank mergers in 2022 is evidence of that.

Nevertheless, the strategic imperatives for making deals remain strong. Banks still clamor for disruptive technology, data and analytics to drive differentiated client experiences. Acquiring a fintech or another business that’s not capital intensive could help meet that need, spurred on by this year’s dramatic drop in valuations.

Another potential deal driver is divesting non-core bank assets to raise capital and refocus the organization. Should a financial institution decide it no longer needs a consumer or commercial financial services business, for instance, it may find an eager buyer among capital-rich private equity firms. 

Explore national deals trends


Deal pace slows from record

In retrospect, it would have been hard for 2022 to keep pace with 2021, when an average of nine bank deals per week were announced.

The record-breaking pace of 2021 was driven by very favorable conditions for mergers, whereas 2022 witnessed historic inflation, fast-rising interest rates, a bear market in bonds, war and fraying trade relationships.

Announced deals this year totaled 227 through November 15, with a total disclosed value of $29 billion versus full-year 2021 when 477 banking deals were launched, with a value of $96 billion.

Only one blockbuster merger was announced in 2022 — the $13.4 billion tie-up of Toronto-Dominion Bank and First Horizon in February.

Meanwhile, a few of 2021’s megadeals received full regulatory approval in 2022, including U.S. Bancorp’s acquisition of MUFG Union Bank from Mitsubishi UFJ Financial Group. 


Divestiture study insights for banking

During an economic retrenchment, a business portfolio review — with the aim of identifying assets that are no longer a good strategic fit and should  be divested — can be a key step in helping financial institutions transform their operations and build shareholder value.

However, timely divestiture decision-making is key. An upcoming PwC study shows that quick decisions and a well-executed plan can help increase the chances for value creation. Here, directors can play a key role. PwC’s study finds board governance is one of the significant factors that  helps overcome the inertia that causes value leakage in divestitures. 

Learn more

“Banking leaders must remain focused on what the industry will look like when the economic cycle turns up again. Capital allocation decisions made today may very well determine which institutions emerge from a recession in the strongest position.”

— Daniel Goerlich, Banking and Capital Markets Deals Leader

Key deal drivers

Capital discipline

Banks will likely retain earnings for the foreseeable future as they prepare for potentially negative changes to their business in 2023, such as increasing provisions for bad loans.

In addition, the industry needs capital to invest in digital and cloud transformation to blunt deep-pocketed peers and competitors in the retail, tech and payments industries.

Capital discipline, however, has a silver lining in a shallow recession. It could give banks the financial firepower to pursue transformative deals using a mix of either cash, stock or cash and stock as bank share prices have been relative outperformers versus fintechs.

Non-bank valuations tumble

Financial institutions may already be considering non-bank deals given that valuations are far below levels recorded a year ago.

For example, quickly rising interest rates have deflated the share price of the Global X FinTech Thematic ETF by 49% year to date through November 15, according to S&P Capital IQ data.

Meanwhile, bank stocks were relative outperformers over the same period with the Financial Select Sector SPDR Fund’s share price falling by 9.7%, according to S&P Capital IQ.

The valuation reset may make it attractive for banks to pursue non-balance sheet deals in services or technology, with the added benefit that it sidesteps the capital rules and deposit caps that can come into play when buying a deposit-taking institution.

New urgency for deal planning

Executives pursuing mergers will need to factor into their deal ROI calculations a potentially longer period of time from announcement to deal closing.

Regulators have stressed their desire to incorporate more voices into deal reviews and are promising to craft new bank resolution rules, adding complexity for buyers.

PwC has long stressed that deal preparation is important for unlocking a transaction’s full potential. The possibility of new regulations and longer regulatory reviews puts new emphasis on deal preparation: crafting a game plan - from announcement to filing to review to closing - is critically important in achieving the deal ROI that management presents to investors.

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Dan Goerlich

Partner, PwC US

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