So your bank buys another one: don’t panic

There is an urgent need to merge among US banks at this time. Investors might not need to take shelter.

It is generally quite pleasant for a bank stock you own to acquire, but often not as pleasant to own the acquirer. It is generally believed that size and scale are beneficial. One of the potential concerns for investors is that a merger could be motivated in part by executive pay, as big bank bosses tend to be paid more, notes Brian Foran, analyst at Autonomous Research. It can also be difficult to independently measure whether savings projections actually materialize in part because conditions for banks, such as interest rates or market direction, are constantly changing. On the equity side: A recent study by McKinsey & Co. found that among 58 mid-cap bank mergers from 2010 to 2021, only 17 merged institutions outperformed their peers in the two years following the deal.

Yet bank mergers and acquisitions are on the rise this year, on track to be the most important for such transactions since 2008 in value terms, the Wall Street Journal recently reported. Recent trades have shown a typical stock pattern: for trades over $ 1 billion from last October through September, acquiring bank stocks had often fallen against the SPDR S&P Regional Banking ETF. .,

according to Autonomous. The median long stock underperformed the index by 6% from the deal’s announcement to its close or until the end of the time frame.

But that’s not the whole story. Some recent large buyers have seen their stocks perform well, even after the mergers have closed, Autonomous noted, such as when SVB Financial closed on Boston Private, PNC Financial Services bought the US banking arm of BBVA and Huntington Bancshares closed its deal. for TCF. These acquiring banks have outperformed the regional banks’ ETFs by around 8% on average since closing.

There might be an opportunity, then. A key consideration is that larger banks typically no longer trade at a valuation discount to smaller ones, meaning that acquiring a smaller bank can be relatively cheaper and more profitable. The forward price-to-earnings ratios of the relatively larger regional banks in the S&P 500 are currently higher than those of the larger group of regional banks in the S&P Composite 1500 and S&P Small Cap 600, according to FactSet data.

Investors seem to be infatuated with size. There are several reasons for this: Large banks are generally more diversified in commission-generating activities such as M&A advisory or wealth management, which are doing very well at the moment. Smaller banks often derive a greater portion of their income from loans and are therefore generally more rate sensitive. Small banks may also have higher deposit betas, which means that when rates rise their funding costs will rise faster than those of large banks. The influx of deposits since last year has shifted to the largest banks.

Low interest rates and weak loan growth may put the stocks of very large banks under pressure at this time. But investors who aim for a longer time horizon can expect their banks to do smart deals in the meantime.

Write to Telis demos at [email protected]

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