Top Issues for Banking M&A in 2014
Searching for growth and scale
Banking analysts and executives had hoped 2013 would offer an improved Merger & Acquisition (M&A) environment after a disappointing 2011 and 2012. Although more deals were transacted at higher multiples and were well-received by investors, the year remained difficult.
Fortunately, a number of catalysts could generate a steady pickup in M&A deal volume during 2014: Larger banks are looking to retool their product mix and geographic footprint, regional/midsized banks are seeking asset growth, small banks are looking for scale and a rising interest rate environment makes deals more palatable across market segments.
However, a lack of substantive targets and a longer regulatory approval process could slow M&A’s momentum, especially for large banks. This paper takes an in-depth look at the following factors which are expected to influence deal activity in the coming year:
- New regulatory paradigm — Regulatory restrictions continue as a major hurdle, although increased clarity may also bring increased confidence.
- Rising interest rate environment — If interest rates rise, banks should generally benefit because they may lead to greater margins and profits. Yet, some banks may have been over-reaching asset duration in trying to maximize short-term earnings, which could be problematic.
- Search for capital-efficient growth — Banks are looking to acquire fee-based businesses that are not capital-intensive, such as wealth management. However, increasing M&A activity is driving up prices.
- Geographic and business line rationalization — As the trend of returning to core and capital efficiency continues, M&A that supports specialization — customers, products and geographies — may increase in 2014.
- Branch strategy — Banks’ efforts to reduce their footprint, optimize branch networks and adopt an omni-channel approach to differentiate the customer experience may drive new M&A.
- Valuation — With the recent uptick in valuations, driven by a rising stock market and improving economic fundamentals, many sellers are looking for stock deals to generate longer-term benefits.
- Technology and data for business generation — M&A may help organizations more efficiently attain technology improvements and capabilities to bolster data management functions.
- Tax — Deferred tax assets and the Foreign Account Tax Compliance Act (FATCA), two focus areas for M&A transactions in 2013, may continue in 2014.
- M&A Readiness — Banks need to be well-prepared buyers and/or sellers so they are able to pull the trigger on potential M&A deals quickly and as a well-oiled machine.
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