The U.S. presidential election triggered a strong rally in bank stocks, with investors expecting banks to benefit from deregulation, greater economic growth, and M&A. While professional pollsters may have missed the mark, the election result was accurately predicted by Moo Deng, a baby pygmy hippo that has achieved celebrity status. Given her clairvoyance, who better to offer her outlook for the banking industry over the next four years?
As we enter a new downrate cycle post-pandemic, bank metrics like cost of funds (COF) and net interest margins (NIM) are in focus. In this month’s Bank Watch, we analyze changes in key metrics from the recent uprate cycle and provide historical insight into how these metrics moved in prior downrate cycles. Historical trends suggest that while margins may stabilize initially, downrate periods often compress NIM. Early 3Q24 data shows signs of stabilization, but the impact of further rate cuts remains uncertain.
Since our last update in 2023, banking deal activity has remained sluggish but may be recovering. Core deposit intangible (CDI) values have slightly increased, averaging 2.74% through mid-September 2024, up from 2.58% in 2023. Interest rates continue to drive CDI values, and recent Federal Reserve rate changes are anticipated to influence CDI values. Although market rates are trending downward, CDI values remain resilient. Future rate cuts could further affect these values, making a detailed understanding of core deposit characteristics essential for accurate valuation.
The liquidity crisis of 2023 has given way to periodic capital raises by regional (and community) banks that are grappling with the aftermath of the Fed’s ultra-low-rate policies. KEYCORP was the latest recipient of a sizable equity investment, but KEYCORP may point to a pick-up in M&A activity.
The banking sector saw a significant rally in stock prices in July 2024 as net interest margins stabilized and improved after a period of compression. M&A activity is also showing signs of recovery, with higher deal volumes and valuation multiples, leading to a cautiously optimistic outlook for the remainder of the year despite potential concerns over asset quality.
This month we discuss the growth of commercial real estate loans despite interest rate pressure, the decrease in commercial property prices, and the increasing number of delinquent loans. The U.S. Federal Reserve conducted stress tests on large banks to assess their resilience in severe economic scenarios, emphasizing the importance of understanding the diverse nature of CRE loans and the varying degrees of risk associated with different types of commercial properties.
Rising regulatory burdens contributed to the stunning growth in private equity the last two decades and private credit in recent years. PE investors ultimately require liquidity, however. Subdued M&A and IPO markets since mid-2022 have spurred growth for private equity secondaries, which mostly consists of GP-initiated transactions for continuation funds and LP-initiated transactions for portfolio interests.
Banks have been divesting their insurance subsidiaries at favorable valuations over the past decade, driven by factors such as higher capital requirements, lower returns compared to public insurance brokers, and increased private equity interest in insurance agencies. This has allowed banks to redeploy capital, improve capital ratios, and focus on their core banking business.
With rising inflation and interest rates, bank investors are facing challenges as stocks are underperforming in the market. As a result, it may be an opportune time for bank investors to consider estate planning opportunities to transfer business value to future generations. The sunsetting of favorable estate tax provisions in 2025 makes it even more important to consider estate planning strategies now.
An investor group, led by former Secretary of the treasury Steve Mnuchin, invested $1.05 billion in New York Community Bank following a surprise Q4 loss. The investment was necessary to boost capital and shore up confidence. Learn more about the transaction and our thoughts on it through the links provided.
The proposed merger between Capital One and Discover could shake up the global payments industry. If approved, it would make Capital One the largest credit card company based on loan volume and third largest based on purchase volume. The deal could also lead to better rewards programs and physical presence for customers, but regulatory hurdles remain.
The 2024 Acquire or Be Acquired conference saw discussions on traditional bank M&A, managing balance sheets, growing deposits, and leveraging technology. There was cautious optimism for an uptick in deal activity in the second half of the year. In this article we recap a few themes from this year’s conference.
One of BankWatch’s favorite artists is the Dutch painter Hieronymus Bosch (1450-1516). One triptych, The Garden of Earthly Delights, depicts a utopian scene in the middle panel adjacent to a hellscape in the right panel. It serves as an apt metaphor for the banking industry’s stomach churning volatility in 2023.
Bank and thrift M&A activity was subdued in 2023, with deal values reaching multi-decade lows. The challenging M&A environment was exemplified by the failed merger between Toronto-Dominion Bank and First Horizon in May, and continuation of the bear market that developed in 2022 for bank stocks and fixed income securities. Despite the overall slump, or perhaps because of it, M&A activity eventually will rebound, potentially explosively if the Fed follows through with rate cuts and the economy avoids a meaningful recession.
In the third and fourth quarters of 2023, securities portfolio restructuring is a strategy that appears to be gaining momentum as more banks are opting to realize losses on underwater securities. In this month’s Bank Watch, we look at some of the recently announced transactions and discuss potential advantages and disadvantages of balance sheet repositioning.
In this article we provide a summary of recent specialty finance transactions by bank acquirors. The article dives into the benefits, risks, and key considerations that bank buyers should examine when evaluating a specialty finance acquisition.
During the third quarter of 2023, market expectations solidified that interest rates would remain elevated for some time, contrary to forecasts earlier in 2023 that the Federal Reserve would begin cutting its target Fed Funds rate later in 2023. In this article, we evaluate the effect of a higher-for-longer rate environment on net interest margins, growth strategies, securities portfolio management, credit quality, and M&A.
Int his article we analyze the trend of higher core deposit intangible (CDI) asset valuations spurred by rising interest rates. We also explore mitigating factors to higher CDI values including an increase in average cost of funds, industry deposit attrition, and shifting deposit mix.
Bank stocks have underperformed in the broad market since the beginning of the year and many currently trade below book value, which begs the question, is goodwill impaired? In this article, we discuss two common questions that arise for banks considering an impairment test: do I need an impairment test and how does it work?
In this article, we step away from the daily drumbeat of questions about bank liquidity, PacWest and CRE loans to review valuation in the context of merger arbitrage. The TD-First Horizon terminated deal highlights why until a deal closes, there is uncertainty for a reason.
At September 30, 2018, First Republic Bank (FRC) reported total deposits of $75 billion, which expanded to about $175 billion at December 31, 2022. A deposit run reversed four years of deposit growth over several days in March, with deposits at March 31, 2023 regressing to the September 2018 level excluding $30 billion of funds deposited by large banks in March 2023. The shareholder value destruction also was crystallized. FRC’s market capitalization declined from $16 billion at September 30, 2018 to $1 billion at April 26, 2023. This month, we look at this stunning reversal in fortune.
In this article we look at the performance of publicly traded banks in what was the worst performance since the GFC other than the first quarter of 2020 with the NASDAQ Bank Index declining 21% for the quarter and 28% YTD through April 26. Analyst estimate revisions have been declining for nine months due to now declining NIMs from rising COFs. The market implies that further reductions are likely to occur. While we do not want to be accused of piling on, we also offer a flyover of beleaguered First Republic Bank (NYSE: FRC).
The Federal Reserve’s aggressive monetary policy tightening claimed its first banking industry casualties in March with the failures of Silicon Valley Bank and Signature Bank. In this month’s issue of Bank Watch, we explore the turmoil that enveloped some regional banks in March and its implications.
In this month’s article we discuss a few themes from the Bank Director’s 2023 Acquire or Be Acquired Conference along with some highlights of the sessions we attended. Over the years the conference has broadened its M&A offerings to focus on a combination of M&A, growth, and FinTech strategies.