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.
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.
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.
“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.”
Partner, PwC US