According to a recent article published by Pitchbook, this year has already shown a positive momentum for deal-making in the U.S. banking industry – a trend worth monitoring as it is expected to surge further as the year progresses and U.S. banks (especially those that already have a Canadian presence) may be looking to acquire financial assets and operations north of the border.

Most recently, Citizens Business Bank announced that it would acquire Community Bank, pursuant to which Citizens' total assets will increase from U.S. $878 million to U.S. $12 billion. This acquisition represents one of 19 M&A transactions that have already been announced within the first three months of 2018. Thus far, the trend appears to be acting as a catalyst for other lenders to harness the financial opportunities available by joining forces. In doing so, commercial lenders can increase synergies and strengthen competitiveness for talent retention, customer acquisition and geographic reach.

To provide further context, this year's M&A activity among U.S.-based commercial banks puts 2018 in the race for decade highs in terms of both deal count and deal value. While the activity may not reach the levels of investment in 2016 (222 investments, worth U.S. $39 billion in deal value), there are many drivers at play which suggest that a comeback is on the rise in terms of increased M&A activity, including acquisitions of Canadian financial assets by U.S.-based banks. Catalyzing (or inhibiting) factors for the expected increase in possible M&A activity in the banking sector could include the following:

  • Rising interest rates. On March 21, the U.S. Federal Reserve announced an increase to interest rates, which almost always means banks can increase their margins and profitability. It is expected that further interest rate hikes from the Feds will occur later on in the year to help slow a booming U.S. economy.
  • Legislative reform. The U.S. Senate passed a new bill which will implement significant amendments to the Dodd-Frank Act, easing regulatory requirements. For instance, banks with less than $10 billion in assets will no longer be prohibited from proprietary trading or engaging with hedge funds and private equity funds, and liquidity requirements will be less stringent.
  • U.S. tax reform. With recent tax reforms, banks will have more capital available. U.S. banks will also be positioned as more attractive to foreign-owned institutions looking to offset slow in-country growth and enter U.S. markets.
  • Fintech evolution. With innovations in fintech, including artificial intelligence and robotics to automate administrative tasks, banks can make changes on the back end and leverage new technologies to expedite post-deal integration and maximize value realization. They can also dispose of costly real estate by closing branches in favour of increased online banking.

Going forward, it will be up to financial institutions to take the necessary steps to put banking M&A into high gear, with ample fuel available to ramp up.

The author would like to thank Joseph Palmieri, Articling Student, for his assistance in preparing this legal update.

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