In banking, bigger is bigger

But to get to better, financial services providers must trade their traditional past for a more nimble future.

Bank of the West has a storied history dating back to 1874, when it was one of 10 banks nationwide authorized to issue paper currency backed by gold reserves. After more than 40 years as a subsidiary of BNP Paribas, the San Francisco-based institution was acquired by BMO Financial Group in December for $16.3 billion, putting a cap on a record year for banking mergers in the U.S.

The value of M&A across the financial services sector, which includes banking, capital markets and insurance, more than doubled to $1.15 trillion in 2021, according to Timothy Johnson, a partner in transaction services at KPMG. This frenzy has continued into 2022 despite rising inflation and increased chatter of a looming recession.

What’s driving this?

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Market conditions: The world is emerging from the uncertainty of the global pandemic ready for action, and a strong stock market has left companies flush with cash for dealmaking at a time of still relatively low interest rates. They’re also eager to cross the finish line ahead of stricter antitrust issues and changes in corporate taxes, Johnson says.

Scale: Eight of 2021’s largest banking deals involved regional banks as an acquirer or target, according to Johnson. Scale may become even more critical as margins are compressed by competition, rising compliance costs, more extensive spending requirements for digital/technology investments, and increased attention on environmental, sustainability and governance commitments.

Fintechs: Traditional banks continue to look over their shoulders as these digital players increasingly dazzle customers and take market share. These fintechs are here to stay, KPMG’s Johnson points out. Given that banks often struggle to develop competing services from scratch, they can either partner with fintechs or buy them.

The full impact of this consolidation on the industry remains to be seen, but it’s already clear that there will be fewer, but bigger players, said Jason Rader, partner at BKD National Financial Services Group, which itself merged with DHG earlier this year.

“Some have suggested there may not be a place for community banks less than a certain size, say $500 million. We don’t agree with that,” said Rader, who oversees a team of 430 advisers serving about 1,400 financial institutions. “Banks will need to have strong succession, growth and other operational plans in place to be able to provide similar types of products that their larger competitors do, while really focusing on providing superior service in whatever their niche areas may be.”

In this environment, what should smart banks do? Here’s what experts advise:

Be prepared: That is, be even more prepared than usual. Ensuring that deals pay off requires precision execution, so buyers must have detailed plans in place and the right people ready to implement them. Don’t be surprised by longer wait times for regulatory approvals, Johnson advises.

Mimic private equity: Take a page from another sector and consider implementing corporate development scanning and due diligence capabilities on par with private equity and venture capital firms, which have turned this into a science, advises a report by Bain & Company. “Winning banks will be those able to evaluate targets and opportunities with the right value investment thesis and develop and document the business case.”

Make the most of the deal. The most obvious source of value from a bank merger is economic, but that’s not where the potential for valuable gains ends. Banks should look beyond the low-hanging fruit to find other sources of value within the deal, and then figure out to get the maximum lift from their acquisition, Bain’s report suggests.

Look internally. Don’t forget your employees—advice that is particularly important during the ongoing “Great Resignation.” Banks need to reinforce and manage their corporate cultures so that employees are “energized, excited and engaged—and want to stay where they are,” Johnson suggests.

Above all, banks have to trade their traditional past for a more nimble future. “In the past, ‘integrate first and transform later’ was a common M&A mantra,” says Johnson, who previously worked as an auditor with Arthur Andersen and in accounting and finance at Bank One. “The best bank acquirers have already replaced that with ‘buy and transform now.’”

Dawn Wotapka is a BAI contributing writer.

Learn how financial services organizations can prepare for and capitalize on M&A growth opportunities in the BAI Executive Report, “Bank M&A is here to stay.”