Survey Says... More Bank M&A on the Way in 2017

 | Nov 29, 2016 | 2:00 PM EST
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Yesterday was one of my favorite days of the year. But it wasn't because it was Cyber Monday. I never even logged into my Amazon account because there is nothing I need at the moment, so there is no point spending money on unnecessary stuff. And it wasn't because it was the Monday after Thanksgiving, although I did have yet another turkey sandwich for lunch.

Monday was a favorite of mine because Bank Director's 2017 Bank M&A Survey was released. So with this latest edition, I got a fresh look at what to expect from our "Trade of the Decade" stocks in the next year.

Bank Director Head of Research Emily McCormick and her team do a fantastic job with this report every year. In the 2017 survey they checked in with 206 chief executive officers, chief financial officers, chairs and directors of U.S. banks to see what they thought about M&A activity for the year ahead.

Once again, in this year's report, it is a case of the big getting bigger and the smaller banks struggling to grow -- either organically or by acquisition. Buyers were most prevalent among those banks that had crossed the survival level of $1 billion in total assets.

Of banks between $5 billion and $10 billion in assets, 70% have acquired another bank in the past five years, while 69% of those in the $1 billion to $5 billion category have also made a purchase. Meanwhile, 10% of names in the $5 billion-$10 billion asset class had purchased three or more banks, while 27% of those between $1 billion and $5 billion had been that active in M&A.

The $5 billion level is still the sweet spot for the industry, and banks appear to be more cautious about expanding as they near the $10 billion level where additional regulatory and expenses become an issue.

The percentage of banks that think the 2017 M&A environment will be better next year fell from last year, but it still came in at 45% in the latest survey. Banks falling between $500 million to $1 billion in assets were the most positive, as 55% of bankers in this category expected a better year. Also, bankers in the Southeast and Northeast were more positive in their M&A outlooks than their brethren in other parts of the country.

In the survey, 46% of banks said they are either likely or very likely to buy another bank in the next year. And again it is those approaching or in the sweet spot that are the most likely buyers, with more than half of names in the $1 billion to $10 billion area expecting to acquire a smaller bank in 2017. Just 25% of banks with less than $250 million in assets anticipate getting a deal done next year.

Mid-Atlantic and Southeast bankers seem to be the most inclined to be buyers in 2017, so shopping for potential targets in those regions makes a lot of sense for us as investors.

Twenty-four percent of all bankers responding to the survey are considering selling their bank in the next year. Regulatory costs remain the primary reason they are willing to consider a sale. While some expect a Trump administration to alleviate those costs, I have my doubts that much will get done in this area in the near future.

Of those considering a sale, 41% also cited shareholder liquidity as a reason to sell. A lot of banks have no real succession plan in place and as executives get older cashing out their chips becomes a more attractive option. Thirty-nine percent of willing sellers cited an inability to find opportunities to grow as a reason to sell.

There is a growing trend away from bank-branch purchases as the value of branches is coming into question with mobile banking continuing to expand. McCormick noted in her commentary that, "Given the rise of mobile and online banking, foot traffic in branches is declining. Banks are evaluating the value of branches to their overall strategy, causing many, particularly the largest institutions, to attempt to rationalize their branch networks by selling or shuttering those branches deemed less desirable." Several bankers I have talked to in the past year now look at branches as more of an opportunity to take out costs when evaluating a potential target.

Bank M&A activity will continue in 2017 and well beyond that. Consolidation in the industry has been going on for three decades and probably has another decade or so to go before the number of financial institutions finally levels off.

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