Are the lights dimming on the industry M&A Dance?

Rising interest rates will slow inflation, but it will reduce spending and “it could cause asset quality problems we don’t currently have,” said Curtis Carpenter of the Hovde Group in a presentation Sunday, the first day of the Acquire or Be Acquired conference hosted by Bank Director magazine in Phoenix. 

Bank earnings are also likely to suffer as expected higher corporate taxes take hold. Carpenter reminded the group that industry earnings increased upon tax cuts implemented by the Trump administration; the opposite will happen when tax hikes take effect under the new administration. 

Loan to deposit ratios are at record lows — at many institutions below 60 percent. While there are some pockets of growing loan demand, many bankers are wondering where new loans will come from. 

Carpenter was one of dozens of speakers scheduled to present at the 28th annual conference, which is set to run over three days. 

Carpenter said size matters and that larger banks can access funds at lower cost than smaller banks. So while weak loan demand will keep bankers from raising the interest rates they charge on loans as much as they might like, they will likely need to pay more for funding, if they need it. This will only put more pressure on net interest margin. Carpenter said his firm recently surveyed bankers and they identified compressed NIM as a top concern. 

In years past, larger banks used to purchase smaller banks as a means of gaining deposits inexpensively to fund loans. Now, most banks are so awash in deposits, those larger banks aren’t looking to buy the smaller banks any more. 

Carpenter noted that the M&A game for banks may be in its later innings. He noted there are simply fewer players remaining. Carpenter noted there are only six states with more than 200 banks (Minnesota, Iowa, Illinois, Missouri, Kansas and Texas), and only another 13 with 100 to 200 banks. Banks with $200 million to $500 million in assets, he said, make up the most likely pool of sellers, and they currently number 1,353. Banks with $1 billion to $50 billion in assets make up 868 banks. He called this group the most likely buyers. “If you plan to grow by acquisition, the window is going to close soon,” Carpenter said. 

Bank stock prices, he said, tend to track the 10-year treasury bond, which is rising. But, while prices may be rising, “the street is not bullish on bank stocks.” Investors, it was noted, seem to like tech companies more. The market capitalization of Apple, for example, at $2.91 trillion, exceeds the market capitalization for the entire banking industry, at $2.27 trillion. “Bank prices are trending upward, but we have a long way to go to get to 2018 pricing,” when the market was strong for sellers, Carpenter noted.