Is banking M&A about to boom?

Late last month, Citizens Business Bank agreed to acquire Community Bank for about $878 million, boosting its total assets to $12 billion in one of 19 M&A transactions announced by US commercial banks so far this year, per the PitchBook Platform.

While the dollar figures may not be eye-popping, the takeover—coupled with recent regulatory changes in the US—could represent the start of something bigger: An uptick in M&A activity among the nation's large lenders.

Investors have already completed 39 banking M&A moves in 2018 worth more than $5.5 billion in combined value, per PitchBook data, and analysts expect many more deals to come. That puts this year on pace to challenge for decade highs in both deal activity and deal value:

Completed M&A among US-based commercial banks

The 222 investments completed in 2015 or the $39 billion in deal value from 2016 may prove out of reach, but early signs indicate a comeback after declining deal totals last year.

Why?

Big changes to big regulations

In a rare example of bipartisan cooperation, the US Senate passed a new bill earlier this month making significant changes to the Dodd-Frank Wall Street Reform and Consumer Protection Act, which was implemented in 2010 as a response to the financial crisis. Several areas of the proposed law will have a direct bearing on M&A among financial institutions, potentially unleashing a flurry of pent-up activity.

One change would exempt banks with less than $10 billion in assets from the Volcker Rule, which bans institutions from proprietary trading or entering certain relationships with hedge funds and PE funds. Another would modify various regulations related to stress testing, leverage requirements and the use of municipal bonds to meet liquidity requirements. A third would increase the threshold of what makes a bank "too big to fail" from its current level of $50 billion in assets all the way to the comparatively stratospheric $250 billion, in the process easing regulatory requirements for several large institutions.

For the better part of the past decade, increased scrutiny driven by Dodd-Frank prevented larger lenders from growing any further through M&A. Which is not to say big banking deals haven't been done—they've just been outliers. Only 25 of nearly 1,400 completed transactions since 2010 in which deal size was disclosed totaled $1 billion or more.

That number is likely to increase in the near future. So too is the value of such banking mergers. The ceiling on dealmaking has been raised, and banks currently reluctant to consolidate might now jump at the prospect of joining forces.
 

Check out more coverage of the forces shaping M&A.