Banks Will Be Slow to Get Back into the M&A Game

M&A activity has really picked up its pace in the past month, with several mega deals being completed. However, don’t expect to see many major banks engaging in mergers and acquisitions because they’re still calculating the cost of the COVID-19 pandemic to look at potential deals anytime soon.

The major lenders that set aside billions of dollars to cushion against the outbreak’s economic fallout have yet to tally up. They do not know the full extent of their losses.

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“You wouldn’t see a merger spike or tick up, when you’re in a recession, until you reach the point of peak charge-offs,” Citizens Bank CEO Bruce Van Saun told FOX Business. “You want to be sure you’re not inheriting somebody else’s problem loans.”

This is similar to the extent of the losses of banks during the 2008 financial crisis. Then, Bank of America paid $4 billion for Countrywide Financial Corp. and its book of toxic mortgages. B of A execs thought the deal to buy Countrywide Financial would lock the bank’s spot at the top of the commercial banking business. But, as well all know and experienced, it didn’t turn out like they planned. At the time, Bank of America was quickly growing through acquisitions of banks. It wanted to expand its mortgage business. California-based Countrywide had exploded in growth by offering subprime mortgages to people with credit problems. It was to attractive of a target.

The Pandemic Shrank the U.S. Economy by a Third

The shelter-at-home orders in many states designed to thwart the spread of COVID-19 caused the U.S. economy to wane. The annualized pace in the three months through June 2020 equalled 37.1%. It was the most dramatic slowdown of the post-World War II era. The effects of the pandemic on the economuy have been devastating. More than 60 million Americans at least temporarily lost their jobs.

As the economy plummeted into recession, federal regulators let consumers put their loans by banks in forbearance without accruing interest. Roughly 7-8% of borrowers took advantage of the offer for the first 90-day forbearance period. About half of that group (3-4%) extended the delay for a second 90-days.

At the same time, the commercial lending business looks especially gloomy. Several industries, including retail, hospitality, travel, and energy may experience permanent changes in customer behavior as a result of the coronavirus pandemic.

The economy is heating up again; however, Wall Street economists believe that we’ll see a seasonally adjusted annualized growth of 23.9% in the third quarter, as peak charge-offs by bnks aren’t expected to happen until the first half of next year. In light of this, bank executive like Van Saun don’t anticipate much in the way of bank M&A for the remainder of 2020.

However, Van Saun acknowledged that the current environment of near-zero interest rates and a flat yield curve makes it hard for banks to show earnings growth and an improvement in return on equity, which has often “been a catalyst for doing deals.”

As a result, he said a deal makes sense if it lets the two sides to take out cost overlaps, “drive efficiency and try to improve performance.”

Last Year Signaled Great Activity for Banks—Pre-Pandemic

A burst of mergers and acquisitions, Image credit: Alpha Stock Images, at the end of 2019 convinced many Wall Street analysts that we could expect 2020 to be a strong one for M&A in the financial industry. For example, in May, there was increasing speculation that Goldman Sachs Group was looking to make an M&A impression once SunTrust Banks Inc. and BB&T Corp. announced a $66 billion merger in December that created Truist Financial Corp., the sixth-largest bank in the United States.

Goldman allegedly was eyeing a major commercial bank with its target list including Wells Fargo & Co., PNC Financial Services Group, and U.S. Bancorp. At the time, Goldman Sachs Chief Financial Officer Stephen Scherr said the bank would be open to acquisitions as a vehicle to upgrade its current projects.

Not just Banks,Other M&A Activity Increasing

Nvidia recently agreed to acquire SoftBank Group’s Arm Holdings for $40 billion; Gilead Sciences Inc. announced a $21 billion merger with Immunomedics; and Verizon Communications has locked down a $6.25 billion purchase for America Movil SAB’s wireless phone reseller Tracfone.

The deals, which analysts say are typical of the “Merger Mondays” that were often seen on Wall Street pre-pandemic, are a signal that business is regaining its confidence in the economic recovery and sets the foundation for a future wave of M&A activity in the banking sector.

“There’s a catalyst in the environment that could result in a higher level of activity,” Van Saun said. “But I don’t think that happens this year just because we’re still in the recession and we’re still managing their credit costs.”