The Election and Its Aftermath
Following last week’s historic presidential election, the stock market surprisingly acted very favorably to bank stocks, sending many soaring to 52-week highs. So what does this mean for banks and M&A in the months ahead?
Deregulation and Higher Interest Rates
The market seems to be counting on a potential rollback of Dodd-Frank, or at least some portions of it, and overall deregulation of the banking industry (as well as other industries). Further, there seems to be growing optimism for a gradual interest rate hike and meaningful jobs growth. These factors appear to be the fuel that has propelled the sudden increase in bank stock prices.
Enhanced Currency & More Deals?
With bank stock prices up, buyers have richer currency to do deals. However, with the vision of less intrusive regulation and higher interest rates, some banks may decide to take a wait-and-see attitude before selling. What we have seen is that growing regulatory burden and skinny margins have squeezed many banks out of business. Could the tide be changing?
The Realities of Deregulation
All of this sounds quite fascinating, but as someone who spent a decade inside the beltway and served as a former regulator, I know that deregulation of any kind is a monumental task. Whether the new administration can effect meaningful deregulation is open to much speculation. At a minimum, it will be a fairly lengthy process, with the results likely not realized for some time. So, I wouldn’t expect any immediate relief and all bets are off if we experience another Wells Fargo-type event.
Predicting the future is dangerous, but fun. There is little downside, even if you are dead wrong. I think once things settle down and the new administration is in place, they will realize the substantial task in front of them. Perhaps some form of Dodd-Frank rollback or regulatory relief will happen, but it will take time. So, in the near term, I think deal flow will be about the same, with the occasional new bank formation by optimists. I guess what I am saying is that the new administration probably will have little, if any effect on M&A. I believe the seeds are already planted and enhanced currency will balance out those optimists who think they can successfully grow their banks and earnings. It can be done, but it will be a challenge that requires a disciplined management and a patient board and shareholders.