Why any M&A boom in banks will mirror shale oil in 2020 — all-stock offers and small premiums

Published Tue, Jun 27 20231:04 PM EDTUpdated Tue, Jun 27 20232:28 PM EDT

Twice this month, Treasury Secretary Janet Yellen said the U.S. may soon see more banking mergers and acquisitions, spurring parts of Wall Street to speculate about the shape of any potential future deals. After the collapse of Silicon Valley Bank and Signature Bank, the rescue of First Republic — all pushed to failure by asset portfolios that fell in value as the Federal Reserve raised interest rates and as depositors moved their money elsewhere — and last month's failed $13.4 billion purchase of First Horizon by Toronto-Dominion , analysts are skeptical there'll be much profit for investors if more banks get hitched. Even if investors pick the right bank before a deal, they're likely to be paid only in stock rather than partly in cash, and the premium will probably be small, according to Don Bilson, head of event-driven research at Gordon Haskett. "If Yellen is right and a wave of any size is coming, we don't think it will be that actionable as the deals we figure to see will likely be all-stock and come with very modest premiums," Bilson told clients Monday. Bilson points to four all-stock deals at modest premiums that occurred in the U.S. shale oil industry in the third quarter of 2020 as models for banking today, in terms of their transaction terms: Chevron bought Noble Energy at a 12% premium. ConocoPhillips bought Concho Resources for a 15% premium. Pioneer Natural bought Parsley Energy at an 8% premium. Devon Energy bought WPX Energy at a 3% premium. Why the pessimism? Bilson points to Yellen last week highlighting a likely decline in earnings when banks report second-quarter earnings next month. That's already reflected in plenty of well-known banks "now trading with mid-single digit forward EPS multiples" as they are suddenly forced to pay more for their deposits, Bilson wrote. There are other hurdles standing in the way of bank deals, Bank of America analysts led by Ebrahim Poonawala said Monday. Regulators are taking too long to approve deals, the firm said, noting that Toronto-Dominion and First Horizon unraveled more than a year after the deal was announced. Meanwhile, broadly speaking, both the U.S. Department of Justice and the Federal Trade Commission are less than friendly toward the idea of industry consolidation, and mark-to-market accounting is crushing bank assets at a time when the Fed is pledging to keep interest rates "higher for longer," Bank of America said. "Purchase accounting, that requires the buyer to MTM the seller's balance sheet to fair value, has made it quite punitive for potential buyers to pursue dealmaking given the immediate hit to capital ratios," Poonawala wrote. — CNBC's Michael Bloom contributed reporting.