We lost a lot in 2020, but we are getting a lot of it back in 2021. One bit of good news apparent in fourth quarter earnings calls is the coming return of the bank merger and merger premium. Connecting the dots to create a portfolio of likely acquisitions should be a fun and profitable exercise this year.
One inevitable force over the last 35 years has been the consolidation of US banks from 15,000 in 1985 to 4000 today:
Yet like many changes last year this cycle took a break. Instead of the typical 80-100 depository mergers each quarter we saw less than half that many last year.
Bank CEOs never stopped thinking about how mergers could solve their problems, and the reasons to merge are as apparent today as ever. Indeed the reasons are so many and so inevitable that we could expect the sector made up for lost time and a merger basket to outperform the market in 2021.
What is so pressing?
- Buyers need to boost margins, and mergers allow this (via loan marks). Enterprise (EFSC) CEO Lally:
- Buyers are more confident on the loans they are acquiring. Old National Bank (ONB) CEO Ryan:
- Buyers want to improve earnings and efficiency, which well-executed mergers achieve. Bear in mind this means buyers often pay 18x earnings but get 12x earnings.
- Both sides of the deal typically shower themselves in shareholder money.
- Arbitrage: Buyers on Nasdaq and in ETFs typically have a 20-40% higher multiple than OTC-listed banks. (No table here but I have run numbers).
- Broader buyer pool: Credit Unions and mutuals are also out buying, as Standard Bank (STND) shareholders learned:
- Sellers know they need scale to help pay for technology (below, JPM CEO Dimon)
- Sellers may be offered more for their bank today than they can achieve through 3+ years of business as usual.
It would not be a surprise to see 50% more mergers this year than in a typical year.
How to profit from this? A few recommendations;
a) Figure out what buyers want – typically demand deposits but can also include urban centers of loan demand
b) Sunbelt generally beats rust belt. Florida and Texas in particular are in constant demand.
c) How much does the board own? More is better
d) Is there a shareholder hero involved? Some include Joe Stilwell, Abbott Cooper, or Ken Lehman…
Ongoing levels of competition and regulation for small banks are nasty; combining forces appears as necessary as ever.