Financial Services M&A and Capital Markets: Top 5 Takeaways From 2020

Financial Services Law

What can we really say about 2020?—a year more unique than any year we can remember. For financial institutions, it was a year that started off with lots of hope and drifted into levels of significant concern as COVID-19 took hold, but slowly has returned to a sense of “cautious optimism” about the year ahead. Below, we have shared our top five takeaways in 2020 and what to expect in 2021.

1. M&A will continue to lag. Mergers have been extremely tepid this year for lots of different reasons, and we don’t anticipate a robust start to 2021. In particular, banks are very cautious about assuming someone else’s loan portfolio while they are still trying to ensure that their own loan portfolio remains stable. There is some M&A wind in the sails, however, and in particular we foresee an increase in mergers-of-equals in the second half of 2021 and into 2022. While these types of combinations have always made strategic sense, issues around relative value and social, cultural, and leadership integration have historically been the largest impediments to bringing these transactions to fruition. COVID-19 has added an additional layer of leadership fatigue in some organizations, pushing them to combine with other institutions while still having a significant say (through equity ownership and board representation) in the combined institution. Spreading the high costs of regulatory compliance, greater investments in technology, compression in interest margins, and business model disruption resulting from COVID-19 and fintech companies additionally make mergers compelling and present the opportunity to enhance shareholder value.

2. The market for debt will continue to be robust. In addition to low interest rates keeping borrowers steadily active in taking on additional credit, low interest rates have been a boon for the subordinated debt market, where banks and bank holding companies have taken on lots of debt (big and small) as “just in case” capital to cushion their overall capital levels. The vast majority of this debt has been ten-year debt with no-call five-year provisions, allowing banks to take the debt out (or replace it) after five years should the markets look substantially different in 2025 than they do now (and as the capital treatment benefits of the subordinated debt begin to decline). Wide-open credit markets and the relative ease with which community banks can obtain investment-grade debt ratings have contributed to another strong year for subordinated debt transactions. We expect that to continue into 2021.

3. Fintech partnerships with banks will grow. Lots of big developments in the fintech market, including some more atypical transactions that we expect will repeat themselves in the coming years. In particular, Varo proved that a fintech can get a national bank charter, and Jiko proved that a fintech can acquire a bank. Of course, having a tech-savvy (and friendly) regulator with Brian Brooks in charge of the Office of the Comptroller of the Currency didn’t hurt, but we will see how long his tenure lasts and whether an incoming Biden administration will apply the brakes on fintech partnerships with banks. Until then, watch for more fintechs to apply for bank charters or attempt to acquire banks. In addition, we anticipate we will continue to see more banks partnering with fintechs to deliver products and expand market share in this new virtual environment.

4. Don’t go “all-digital” quite yet. Much has been written about how COVID-19 has taught us how to work from home and that we don’t need bank branches anymore. But that may be an incomplete story and does not reflect what will happen as the younger generations continue to age. Pushing a few buttons and chatting on a screen with a helper bubble is nice for simple banking, and for many individuals that may be enough, but financial situations generally become more complex as people age. As a result, nothing can ever replace meeting face-to-face with someone with whom you can develop a personal relationship and who truly understands your financial business. For that, customers will need “personal” banking. This does not mean, however, that adoption of digital strategies and use of virtual tools will not remain critical in the future of financial services. Figuring out the best means to integrate a high level of personal service, whether face-to-face or assisted by Webex or Zoom, with self-service technical offerings is a must for banks to succeed. In addition, banks will need to continue to round out their service offerings in order to compete effectively with nonbanks by providing, directly or through partnerships, a full complement of financial services and products. This means increased spending on an operational level, which will negatively impact the bottom line in the short term but provide longer-term growth opportunities.

5. Investing in talent. The pandemic has taught us many lessons. Perhaps one of the biggest is that the right talent excels even in the most challenging of circumstances. People who are able to adapt and find new opportunities to drive growth even in unprecedented times are critical to an institution’s stability, success and growth. Financial institutions need to spend resources not only to acquire the right talent, but to continue to develop that talent so it prospers in times of crisis and in times of change. This kind of training involves more than pure subject-matter expertise. Financial institutions need to foster a culture of leadership and innovation within a framework of ethics, safety and soundness. They also should not be biased in favor of millennials or the Generation Z populace. Indeed, mid-career and senior talent who have lived through the ups and downs of prior economic cycles and have been shaped by more personal experiences that only age can bring may be among the best resources.

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All the best from Manatt Financial Services for a prosperous 2021!

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