Garnet Capital Advisors Blog

August 2023 recorded the highest rate of M&A activity in more than a year despite recession fears, dwindling financial stocks, and increased regulatory scrutiny. Again, this September saw the announcement of seven US bank M&A acquisitions, bringing the year's total to 79 transactions.

Forbes Finance Council states that "history demonstrates that M&A agreements completed during times of economic instability tend to be successful, although today's current circumstances may make some CEOs hesitant to proceed because a longer-term plan is in effect. According to Bain & Company, "Banks are making strategic moves to navigate a changing industry."

When a downturn like the one we've been experiencing ends, pent-up demand eventually follows, Resch explained. "It's kind of the classic rubber band effect." 

Potential Catalysts for Bank M&A

According to industry expert Thompson, the recent activity in August may serve as a harbinger of increased deal-making in the near future. According to American Banker, "Bankers point to some potential catalysts that could jump-start consolidation:

Seek Competitive Advantage and Technology Offerings

Merging with larger banks may be an appealing solution for smaller banks that need help keeping up with the significant technology expenditures made by their larger competitors. The aim is to address the rising costs brought on by technological improvements while simultaneously improving the efficiency of digital offerings.

Through a merger, they can benefit from larger banks' technological strength and provide their clients with improved services. The synergy produced by such mergers may be a calculated reaction to the growing rivalry for deposits and the need for cutting-edge technology solutions.

Portfolio Diversification and Growth

Larger community and regional banks, on the other hand, are motivated to engage in M&A transactions by their strategic imperatives. To boost interest-income growth, these banks are eager to increase the size of their loan portfolios and deposits. Another driving factor is the diversification of funding sources, which gives these banks resilience against market swings. Such mergers are a proactive step to protect credit quality in a dynamic financial landscape.

Impact of Bank M&A on Loan Sales

Mergers and acquisitions (M&A) have become a common event and often lead to increased loan sales. The following remarkable pattern may be seen in these deals:

Dynamics of Orphan Portfolios

After a merger, banks frequently find themselves reviewing their portfolios to fit their newly created objectives. The decision to sell orphan portfolios becomes more common within a year of a merger. 

Banks decide to sell orphan portfolios due to the strategic concerns of the acquiring institutions. Most times, the acquiring institution may already have a significant presence in the orphan portfolio industry. This makes it more valuable to them than to the original owner.

Other times, the acquiring institution does not like a particular sector and decides to sell the loans with the benefit of merger accounting. The strategic reshuffling enables banks to optimize their loan portfolios. They can focus on their resources where they see the greatest opportunity for development.

Sale of Nonperforming Loans 

Selling nonperforming loans (NPLs) inherited from the purchased firm is another fascinating facet of bank mergers and acquisitions. Nonperforming loans, or loans with serious repayment problems or default risk, are a burden that acquiring banks try to clear following a merger.

Selling NPLs can be a strategic decision for acquiring banks that seek to streamline their balance sheets and reduce risk exposure. It also enables the acquiring bank to allocate resources more effectively and concentrate on building performing assets.

Navigate Your Financial Future With Us!

Analysts predict that M&A activity will increase going forward due to a number of interconnected reasons. Garnet Capital is now, more than ever, the best resource for advice on all asset classes and performance ranges. Contact us if you need any additional guidance on your forthcoming loan portfolio sales.