Bank M&A floodgates haven’t opened yet. Or, rather, the gates are open but most banks aren’t rushing to capitalize upon the meaningful changes in regulatory posture regarding bank M&A.
Interest in consolidation hasn’t waned, but increasing uncertainty is damping banks’ eternal eagerness to get better by getting bigger, rather than getting bigger by being better (a quote from Dick Kovacevich that I’ll never forget). Concerns about inflation, fueled by wild gyrations in oil particles thanks to the Iran war, continue to plague all banks, the Federal Reserve included. This is also due, in part, to an economy that thankfully continues to be vibrant against many odds. Consequently, interest rate expectations zig-zag as well, moving from a consensus expectations of at least two rate cuts in 2026 to none, and possibly even rate hikes, during the same period. Further, broader market volatility ads to jitters across many a boardroom. Valuing deals has become even more of an art than in the past, in face of such uncertainty. From AOCI to credit markers, traditional bank valuations are experiencing wider ranges than ever.
All the above have contributed to a slower deal flow among all banks but the largest. Nevertheless, the appetite for growth by acquisition remains high and many institutions continue to actively evaluate buy-sell opportunities. Increasing volatility contributes to the importance of being ready to execute a transaction quickly, especially as regulatory approval time has declines by roughly a third. Rapid valuations, negotiations and integration preparedness are now essential to successful M&A execution, as well as capital positioning.
In the past four quarters mega-deals dominated the M&A scene, with five significant banking transactions >$5 billion. Additional consolidation continues as well, with 130+ bank-to-bank deals and 100 credit union mergers in the period. Indeed, participants continue to expect increased efficiency, scale plays, product line additions and market share grabs.
At the same time, some of the regulatory constraints that previously weighed on the sector have eased, paving the way for greater confidence in deal approval and close time. US bank deals are closing in median132 days, down from 187 days the year before. A more welcoming regulatory posture also increases the confidence level in the deal getting through and decreases the regulatory cost of getting it done due to streamlined approval processes. The revised Endgame Basel III guidelines, now out for comment, signal a more predictable capital requirements going forward. Thesepositive developments continue to fuel M&A interest despite new uncertainties around systemic risks. Strong capital positions and renewed emphasis on capital management methodologies add to the M&A interest, as does the continued pressure on cost management and efficiency ratios.
As demand for additional technological investments, including AI, grows exponentially without clear payback strategies or timelines, the pressure on all of us to spread operational and compliance costs intensifies. Our vendors’ failure (intentional or unintentional) to add flexibility and modularity to ancient core system and nip certain modernizations in the bud leaves banks with few options but to spread such non-negotiable investments over a larger revenue base to ensure continues EPS growth and marketplace relevance. There is no respite or relief in sight, especially as the nations’ largest bank and technology companies continue pouring trillions of dollars into AI and competitive core offerings remain unproven or unavailable.
On the negative side, market and environmental uncertainties have increased meaningfully. Geopolitical, policy, fiscal policies and other risks that are difficult to price into deal models are now far more relevant in the past, and far harder to predict or quantify. Kevin Warsh at the helm of the Federal Reserve is another new and less known key leader whose impact on interest rate policy remains to be seen.
Another major development whose impact is yet to be determined is the rapid emergence of digital assets and deposits, starting with Stablecoin. These new assets raise profound questions regarding the valuation of traditional deposits. As stablecoin and digital asset governance frameworks are reshaping the deposit and payments landscape, dealmakers must rethink traditional views and pricing of deposit franchises. There isn’t enough history yet to assess the persistency factor of these new assets; will they behave like other digital deposits? Branch-based deposits? Or altogether have a different loyalty pattern? Active regulatory approvals and growing public market activity underscore the sector’s momentum, reflected in the nine digital asset and fintech IPOs completed over the last four quarters, raising more than $5 billion. The GENIUS Act has created a clearer path for stablecoin issuers to operate within the US regulatory framework, including under OCC-supervised structures. It is yet to be seen how stablecoins will compete for transaction balances and payment flows that have historically resided within the banking system, potentially causing investors to reassess how they value deposit franchises. This adds much complexity to M&A activities as banks’ prized possession – the non-interest-bearing, branch-based deposit – is under challenge from an entirely new type of deposit residence.
In sum, the appetite for M&A is still strong, and tail winds support that momentum. At the same time, uncertainties are more present than in many other periods, and new products challenge traditional valuation methodologies for some of banks’ most important assets.