May 17, 2023 - 2854 views|
With the currently slow pace of mergers and acquisitions, now’s the time for banks to retool for a successful purchase or sale.
The pace of banking mergers and acquisitions (M&A) activity has slowed dramatically compared with previous years. The four deals announced in March were the lowest monthly tally in the US since May 2020.
Although it was a unique set of circumstances that led to the recent high-profile buyout of First Republic Bank by JPMorgan Chase, the broader banking sector remains under pressure. Regional banks are not yet out of the woods, and given the ongoing upheaval, larger banks may adopt a wait-and-see approach when it comes to M&A.
In the near term, the area of greatest activity may be carve-outs. Selling off riskier portfolios is a way for small and regional banks to create a more stable path forward. For organizations with higher risk tolerance and stronger balance sheets, there is an opportunity to acquire asset portfolios at significant discounts.
Once the environment eases, M&A activity will likely pick up, reflecting the underlying benefits of scale and potentially increased regulatory scrutiny. It is likely that small fintechs and neobanks could also become attractive M&A targets. Because these firms straddle both the banking and tech sectors, many are reeling from a tough year. As startups, they need ready access to capital to fund their growth—especially as tech titans such as Apple enter the banking space.
“Given the liquidity crunch in the market, small and regional banks are grappling with the existential question of whether to try to ride out the financial storm, get acquired or exit certain markets,” says Sanghosh Bhalla, Senior Banking Consulting Principal in Cognizant’s Banking and Financial Services division. “It is a time to rebalance portfolios, redefine strategies and identify the drivers for acquisition as well as potential divestments.” It is also a time to gauge your bank’s readiness to handle a merger or acquisition, he says.
Acquiring banks will undoubtedly be selective when assessing risk profiles, seeking targets that are diversified, have strong credit management practices (especially in the pressured commercial property sector) and exhibit stable asset and liability management. They will also be focused on the ease of integration.
“Gaining a digital edge is key,” says Bhalla. “Acquisition strategy should focus on capabilities, not just assets.” That’s because there are plenty of small and community banks that do well but lack sophisticated digital capabilities, which is why technology and infrastructure integration are increasingly influential factors in M&A, he says.
“When bank executives were asked to rank their top concerns in acquiring another bank, technology integration was number three,” Bhalla points out, following closely behind corporate culture and retention of key staff, HR and finance.
The Day One integration that kicks off mergers and acquisitions typically falls far short of the blending of operations and staff that will need to occur for a successful merger. For acquiring banks, a key question is whether they have the capabilities in place to scale.
That is, if they gain five million new customers through an acquisition, will they be able to serve them? Are they prepared to merge systems and processes? Managing a seamless, stable integration requires internal depth to minimize risk and ensure there’s no disruption of banking activities.
For more information on how banks can weather the market’s financial instability, see our earlier installments on commercial deposit onboarding, liquidity monitoring and asset and liability management.