Choose your Future: Acquire or Be Acquired


February 7, 2023

The OakNorth team recently spent time with a number of the industry’s most influential leaders at Bank Director’s “Acquire or Be Acquired” Conference in Phoenix, Arizona. And we can tell you it was a real eye-opener, with opinions that were illuminating, even sometimes challenging, but certainly worth listening to. 

What were the key takeaways? Well, there were plenty, but we’ve summarized the highlights here:

The ‘state of the union’ in 2023 

The economy is facing great uncertainty with a heavily disruptive outlook resulting in alterations in 4Q earnings for most banks. As a consequence, investors are rewarding banks that provide greater earnings certainty, even if they’re simultaneously downgrading their 2023 outlook. 

The race for deposits 

Deposit betas are increasing and set to rise throughout 2023, with a continued shift of deposits to the largest banks. For example, $100bn+ banks have grabbed a much larger share of the deposit market, growing from 41% to 65%, with banks now asking for deposits as part of their lending relationships. 

Fintech builds momentum 

The retail and small business communities are showing an increasing appetite for fintech as they seek competitive advantages. We see the likely winners as those with truly market-leading and unique propositions. 

The changing face of community bank values 

There was much debate on whether the economic slowdown will trigger a credit event. We have undergone the most drastic rate change in modern history, with significant impact on bank accumulated other comprehensive income (AOCI) and tangible common equity (TCE). It was thought that the AOCI impact will be felt as a hindrance to M&A activity. 

We’re also seeing the current economic uncertainty manifesting in credit quality assumptions, as banks take higher-than-normal provisions, despite lower-than-normal losses. With this in mind, larger banks are perceived as having greater value as they benefit from efficiencies and economies of scale. 

Achieving growth in an environment of rising rates 

Of course, there are two options for growth: organic or through M&A. Against a backdrop of uncertainty, now is seen as an opportunity for M&A or tech investment. Depository M&A will be the trend towards the latter part of the year, and banks will have to grow or sell. 

However, community banks need to be aware that there are some credit risks to be considered, which is one of the main reasons for retrenching M&A activity. AOCI has given a hit to tangible equity and funding is proving to be more problematic. However, with the right loan-to-deposit ratios, attractive and good-performing community banks could be an acquisition target for the larger players throughout 2023 and 2024. 

As a result, ‘grow or die’ might be the outlook for many. Looking at organic growth, our conversations lead us to believe that loan pipelines are still pretty good, resulting in high single to double-digit growth for the majority of lenders. The question is how banks fund this lending properly. 

Banks need to become more relevant to their customers, including understanding their needs and realizing how they can help them through challenging times. This organic growth is what provides the fuel for M&A further into the growth journey. However, it’s vital this growth is twinned with efficiency and not just growth for growth's sake.  

To finish up 

Looking ahead to 2023, banks need to focus on core deposit franchises, funding, and securing a strong and reliant deposit base. Now is a good time to pay special attention to borrowers and start thinking longer term to secure strong and stable growth in 2024. 

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