Garnet Capital Advisors Blog

Despite lackluster stock market performance, banks are growing via acquisitions of nonbanks and of other banks. Industry observers believe 2019 could be an M&A year for banks.

The market performance of bank stocks and underlying investor skepticism, coupled with the regulatory climate, would seem to have quashed any ideas of regional banks purchasing each other. But the fact is, banks are growing. How? By acquiring nonbank companies and financial technology (FinTech) companies – and, yes, merging with other banks.

Mergers and acquisitions are one way for banks to grow and compete with larger banks.

A Doubling of Nonbank Acquisitions in a Year

In total, banks in the U.S. have bought nonbank companies at a pace that has doubled in the last year, according to Bloomberg; nonbanks range from wealth management firms to FinTechs.

Case in point? In January, PNC Financial Services Group Inc. announced an agreement to purchase an investment bank. KeyCorp made a deal to buy a digital lender. U.S. Bancorp purchased a FinTech specializing in software for payments. 

And that’s just this year. Last year, Citizens Financial Group Inc. made purchases in both the mortgage and wealth management areas. Its CEO indicated that the company is still in the market for 2019, including for a firm specializing in mergers and acquisitions.

Banks want to grow in this way because of the playing field. Institutions like JPMorgan Chase & Co. are enormous, and their competitive threat is large. Regional banks who acquire FinTechs or fee-based arms such as wealth management firms can hope to compete because of the technological advantages, cost-cutting, and income streams.

Purchasing a FinTech can make a bank more competitive.

Stock Market, Regulatory Oversight Still Concerns

Banks mergers with each other are subject to regulatory oversight, of course, as well as capital requirements. And despite the picking up of the acquisitions pace, the fact that many bank stocks have not done well is a challenge for banks wanting to purchase other banks. 

Case in point: Fifth Third Bancorp’s deal to purchase MB Financial Inc. in 2018. The $4.7 billion acquisition was the largest merger between banks in three years. But that didn’t prevent the stock from swooning; it registered the biggest drop in two years. Even the recent stock price was still 19% under the price prior to the deal’s announcement.

Despite these challenges, many banking industry observers believe that scale will drive regional bank mergers to new heights at some point in the future. There are over 5,000 community and regionals, all competing for a similar customer and similar technologies.

Easing of financial regulations and the effect of the 2017 Tax Cuts and Jobs Act could set the stage for an increasing number of mergers. Some industry observers believe that 2019 could see more mergers, and point to the recent announcement of a Chemical Financial Corp. and TCF Financial Corp. merger as an example. The stock market remains calm at the announcement.

A Whole Loan Broker Can Help You in a Competitive Environment

In a competitive environment, banks need to optimize their portfolios and have robust relationships with lenders. A whole loan broker like Garnet Capital can help banks develop relationships with lenders to buy loans as a way to assess whether to make an equity investment.

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