Banking and capital markets: Deals 2022 midyear outlook

Bank dealmaking: the pause that refreshes

When doubts rise, dealmaking takes a hit.

Concerns that had simmered for months ⁠— the negative economic effects of virus lockdowns and potentially aggressive rate hikes ⁠— boiled over as war in Ukraine forced markets to price in a greater recession risk, dampening merger appetite.

Dealmakers were understandably reluctant to launch a takeover ⁠— the economy’s trajectory and rollicking markets confounded the best forecasters, undercutting confidence.

Still, many banking and capital markets executives took a wait-and-see attitude to deals. That suggests to us that once the doubts are resolved, corporate tie-ups could quickly return to satiate investors’ demand for growth and transformation as digitization expands. Clarity on interest rates or a significant change in deal valuations could revitalize merger activity.

A potential silver lining of the pause is that it may uncover opportunities obscured by today’s uncertainty.

Banking outlook: watching, waiting

There were 241 banking deals announced from November 15, 2021, to May 15, with a total disclosed value of $35 billion, including two big cross-border deals.

Small banks continued to make deals in the second quarter despite the uncertainty with buyers expanding their footprint to nearby markets where the population is growing, drawn by a better work-life balance or a lower cost of living.

Canadian banks use excess capital to expand in US

• Toronto-Dominion Bank (TD) & First Horizon (February, $13.4 billion)
  In 2022’s biggest deal so far, TD expands in growing southeastern US states, including Florida, Tennessee and North Carolina.
• BMO Financial Group & Bank of the West (December, $16.3 billion)
  BMO said it would enter the California market at scale and double its US footprint.

Data-driven

• Intercontinental Exchange (ICE) & Black Knight (April,  $13.1 billion). The transaction builds ICE’s position as a fast-growing, end-to-end electronic workflow solution for the evolving U.S. residential mortgage industry. Adding Black Knight’s technology, real estate and mortgage-related data assets may increase automation and efficiency, lowering loan origination costs. More data may help homeowners reduce their payments and the likelihood of default.

Deal headwinds versus opportunities

• Deal uncertainty centers on interest rates, inflation and bank liquidity, exacerbated by market volatility and falling stock prices for banks.
  • The benefit of rising rates on net interest income may be more than offset by falling loan demand as the economy slows; softer mortgage demand may be an early warning.
  • Inflation is causing bigger consumer bills and crimping corporate profits; will they fill the void by drawing down deposits built in 2020, harming bank liquidity?
• The rout in valuations for fintech, neobank, payment, wealth management and other consumer-facing companies may spark takeover offers as convergence of those sectors continues.
• Cash-rich private equity (PE) firms in the midst of transformation remain viable dealmakers, interested in consumer and commercial financial services.

A look back at key transactions from the second half of 2021:

• US Bancorp & MUFG Union Bank (September, $8 billion)
• Umpqua Holdings Corp. & Columbia Banking System (October, $5.2 billion)
• Citizens Financial Group & Investors Bancorp (July, $3.7 billion)
• Truist Bank & Service Financial Company (August, $2 billion)
• First Interstate BancSystem & Great Western Bancorp (September, $2 billion)