As a result of rising interest rates, more buyers are looking for attractive deposit franchises as the competition for deposits continues to increase and deposit betas accelerate. With the largest banks growing their deposit market share via organic customer acquisition, the next tier is under pressure to further expand markets and increase assets. Larger regional banks are trying to develop through acquisition, ramping up their corporate development teams to make depository as well as fee-based deals. Amongst the key potential targets are rural banks with a secured deposit base, especially those with significant mass.
We expect regional M&A activity to gain momentum with deal flow benefiting from regulatory relief, specifically, the raising of the Systematically Important Financial Institution (SIFI) threshold to USD250 billion (from USD50 billion) in assets, and from tax reform creating surplus capital available with banks. On the transactions side, we saw a couple of mergers of equals (MOEs) that have fared relatively well on stock price performance. Such transactions have been well received from the investors — an indication that we are likely to see more MOE transactions in the coming years. There is also a desperate need to develop financial technology to drive more regional mergers.
“We expect an increase in the volume of larger transactions in 2019; much of this driven by institutions that have not done sizeable deals over the last 5-10 years. Market participants should refresh their entire deal process. Everything from target identification to diligence and integration should be evaluated to ensure current issues are adequately addressed. Finally, management teams should ensure that they can clearly articulate the strategy they are pursuing to their investor base.”