Bank M&A 2024 — Off the Bottom
In our year ago M&A epistle, we speculated that activity would improve and that a related theme could be equity recap transactions. The prediction was hardly heroic because M&A activity in 2023 represented a multi-decade low, while low public market multiples for a small subset of banks with high CRE exposure signaled investor expectations that an equity infusion was possible.
M&A activity rose off the bottom in 2024, but not by much while pricing remained modest by historical standards. There were 126 transactions as of December 23 that equated to 2.7% of January 1 bank charters compared to the multi-decade low of 101 transactions in 2023 (2.1%). Transactions with a disclosed value increased to 54 with an aggregate value of $16.8 billion from 26 deals in 2023 ($4.2 billion), though the aggregate value this year was the sixth lowest since 1990.
There were two notable equity recaps (Flag Financial, NYSE: FLG; First Foundation, NASDAQ: FFWM) and lots of equity raises to fund balance sheet restructurings, including a $2.8 billion equity raise by KeyCorp (NYSE: KEY). We look for more equity raises in 2025.
The set-up as of year-end 2024 is for much more M&A activity in 2025.
Institutional investors have supported M&A by funding nine common raises buyers undertook to strengthen post-closing capital ratios.
Bank stocks as acquisition currencies improved as P/E multiples have expanded to 11-13x consensus 2025 estimates compared to 9-11x consensus 2024 estimates last year.
Earnings are expected to improve in 2025 after two years of contraction for many banks as NIMs stabilize or improve while credit costs increase only modestly.
The incoming Trump Administration is expected to pursue policies that are business friendly, including the appointment of bank regulators who nix or modify a range of burdensome regulatory edicts and more quickly approve merger applications.
How much, if any, M&A activity accelerates with or without improved pricing in 2025 remains subject to multiple variables as always. The economy and bank credit quality are in good (or good enough) shape and public market multiples have improved.
Also, spreads on high-yield bonds and leverage loans are tight at multi-year lows, reflecting investor optimism about credit quality for the time being. The corollary is that credit marks for most sellers were limited compared to the existing loan loss reserve before factoring in the CECL “double counting” reserve build. ...
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