Banking and capital markets: US Deals 2024 outlook

Bank dealmaking stuck in neutral

Shrinking net interest margins, slow-moving regulatory deal reviews and bank stock prices still depressed by the FDIC’s interventions continue to suppress the industry’s anticipated consolidation. These and other mitigating factors outweigh the compelling trends that we see as a strong impetus to banking and capital markets dealmaking.

Among the compelling trends: the reinvention of banking business models powered by enterprise-wide digital transformation, new uses for artificial intelligence and, for some institutions, a desire for a different business mix that’s less reliant on interest rate spreads. Together, those forces form a foundational industry shift prompting banks to scrutinize their profit drivers, which business lines they operate in and how they’re organized. CEOs are pursuing their vision for how to compete in this unfolding new age of banking. And dealmaking will be in service to that long-range view, which may produce surprising tie-ups rather than adhering to historical patterns.

We may not have to wait too long to see what surprises are in store. The factors currently inhibiting dealmaking — stock prices, interest rates and regulations — are cyclical and when they change direction, they’ll constitute a tailwind spurring the long-anticipated consolidation wave.

Explore national deals trends

Note: The primary M&A data source used in the year-end outlook is S&P Capital IQ. This is a change from our past outlook reports.​

Key deal drivers

Much time has been spent over the past 18–24 months discussing sector trends that are expected to drive deal activity between financial institutions. Just as important are several impediments keeping potential buyers on the sidelines.

  • High interest rates and embedded losses in target bank loan and debt securities portfolios require more scrutiny from interested buyers. The impact from absorbing losses due to sustained high interest rates has created hesitancy among buyers.
  • Share prices have yet to recover from March’s events. As the primary currency in bank M&A, stagnant or falling stock prices suppress deal activity. A continuation of the equity rally observed in November might help potential buyers rekindle deal talks as financial institutions are able to capitalize on their rising share price.
  • Merger review speed and deeper scrutiny by regulators is extending deal closing timelines. Protracted regulatory approvals for bank M&A over the past few years is a disincentive for many potential buyers. Other strategic alternatives to growth (e.g. fintech or private equity partnerships), may become more appealing compared to the length of time banks are waiting for acquisition approvals.

Capital allocation: Size, capital matter in banking

While the market has stabilized in the aftermath of the bank stress events in early 2023, deposit retention continues to be a top concern where retail and corporate customers equate being bigger with financial stability. Becoming larger may also help banks absorb an expected increase in the cost of meeting more complex regulations and higher capital levels in the Basel III Endgame proposal. Pursuing growth through M&A, however, must be undertaken in a way that does not degrade capital. Financial institutions are focused on growing “good” capital and shedding assets that carry higher capital charges compared to their core balance sheet. We’ve observed this recently with several banks divesting non-core units.

High interest rates and embedded losses in target bank loan and debt securities portfolios require more scrutiny from interested buyers. The capital impact from absorbing those losses due to sustained higher rates creates hesitancy among buyers.

Lastly, larger institutions are more likely to have the budget to continue investing in technology and customer experience to compete with the industry’s biggest players and the deep-pocketed consumer brands that are encroaching on the financial services industry.

Business model reinvention needed

The combination of heightened regulatory supervision, increasing compliance costs and the potential impact from US regulators’ implementation of Basel III Endgame rules are helping drive long-term changes 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 are likely to rise as the cost of doing business increases. And those costs make it more necessary for banks to reinvent their operations. PwC’s recent divestiture study found that companies that actively review their portfolio of businesses increase their chances for value creation.

We have already observed many financial institutions execute strategic divestitures of non-core banking businesses with an eye toward increased capital requirements. 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 regulatory demands.

Private equity partnerships with banks are growing in importance amid the quest to optimize a financial institution’s balance sheet and customer relationships. Increasingly, PE firms and banks are experimenting with novel private credit structures.

“The bedrock business model that banking is built on continues to shift. Transformation is top of mind for every executive but it’s not one-size-fits-all; it’s taking various shapes as they formulate a strategy for the dawning of a new age of banking.”

— Daniel Goerlich, Banking and Capital Markets Deals Leader
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