Banking and capital markets: US Deals 2023 midyear outlook

Bank stress opens door to consolidation wave

The lull in big banking deals was dramatically broken when stresses in banking led to several FDIC-brokered asset sales. These deals shook up the ranking of America’s top banks. And we expect that reshuffling, and forthcoming regulations, to make deals an appealing avenue for addressing banking’s changing competitive dynamics.

Stresses in the US banking system are forcing the industry to allocate capital with greater discipline, shore up capital buffers and respond to meaningfully tougher regulatory oversight. We believe the potential squeeze on profits from those forces, plus higher funding costs and increased competition for customers, will drive a wave of bank mergers and asset sales, especially among small- and medium-size banks. Despite a difficult M&A regulatory climate, deals may be the optimal way for banks to grow and protect the franchise.

Explore national deals trends

We believe several trends make deals an attractive option.

  • Consolidation: Large, healthy banks — those with sound operating infrastructure and the ability to profitably integrate new assets — could acquire small- and medium-size banks facing challenges.
  • Focus on core assets: To improve operations in a recession, banks may consider divesting of or finding partners for non-core units requiring significant investment.
  • Digitization: As digital options increase and customer needs change, banks may consider investing in innovative fintech assets that expand product and service offerings and provide distinctive capabilities and competencies.

Transformational dealmaking

New rules on data sharing and clean rooms are changing the process around how to successfully integrate two banks. That complexity means that integration planning has to start earlier — and be given adequate resources — to achieve deal ROI.

In our recent M&A integration report, we found that long-term operating models are in development earlier in the deal cycle, with 60% of companies planning before due diligence, compared with 25% in 2019.

Companies are cracking the code on how to make deals a success: leveraging experience, early and sustained investment in integration, and a commitment to creating and implementing new long-term operating models.

Learn more about leading practices and transformational mindsets in PwC’s new M&A integration report.

Key deal drivers 

Bank stress deals shake up industry

For a select few banks, the industry’s stresses provided an opportunity to become larger by taking possession of distressed assets during auctions brokered by the FDIC (see our guide to deal-making in a stressed environment).

Two mid-size institutions, First Citizens and New York Community Bank (NYCB), moved up in the rankings of America’s largest banks after their headline-grabbing deals. First Citizens entered the ranks of the top 20 with its successful bid for Silicon Valley Bridge Bank. NYCB took over most of the assets of Signature Bank. JP Morgan Chase expanded its geographic footprint by taking control of First Republic Bank.

The reshuffling of the leadership ranks in banking could spur other firms to join the race to become larger. Size matters in the immediate aftermath of the bank stress events as retail and corporate customers equate being bigger with being more financially stable. Becoming larger may also help banks absorb an expected increase in the cost of meeting more complex and tougher regulations and higher capital levels (see PwC’s Basel III Endgame and Our Take reports).

Last but not least, larger institutions are more likely to have the investment budget to continue the process of  becoming a fully cloud-powered bank able to compete with both the industry’s biggest players and the deep-pocketed consumer brands that are encroaching on the financial services industry.

Necessity for business reinvention

Recent bank failure reports released by regulators strongly suggest, in our view, that tougher regulation and supervision will be a long-term change for the sector. Government rulemaking, and perhaps Congressional legislation, are likely to mandate more complex scenario modeling, exacting risk modeling, stringent internal auditing and more thorough resolution planning. No matter the form new regulations take, bank expenses will likely rise as the cost of doing business increases. And those costs could make it essential that banks reinvent their operations. PwC’s recent divestiture study found that companies that actively consider and execute on portfolio renewal are likely to generate more value than those that don’t.

In addition, capital levels could rise substantially in the next couple of years, with the exact amount dependent on how US regulators decide to implement Basel III Endgame rules regarding capital levels. Smaller institutions, already facing a potential profit squeeze from paying higher yields on deposits and strengthening internal controls, may find few avenues to grow the business while also addressing regulator demands.

“Institutions need to be ready to seize the multiple opportunities that may arise at a moment’s notice. After this year’s events, deal ROI assumptions should be updated in M&A strategy playbooks to reflect potential regulatory and required capital changes.”

— Daniel Goerlich, Banking and Capital Markets Deals Leader
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