Analyst: Pandemic response, merger and acquisition activity on banking horizon in 2021

Analysts are watching consumer spending, jobs and unemployment, and control of COVID-19 to gauge financial institutions’ year-in-the-making. One influential observer is still keeping his eyes on potential mergers and acquisitions.

In the forefront is getting the pandemic under control. The past year’s volatility with inevitable industry setbacks led to a spike in unemployment, although numbers are improving. Consumer spending helped boost the economy mainly due to Congressional stimulus relief.

Matt Olney, CFA, research analyst for financial institutions at Stephens Inc., said there is a lot to digest, but most eyes are on efforts to control the coronavirus.

“The assumptions right now, I think, are that the vaccine is rolled out, and it’s rolled out in the current of the original expectations from a few months ago,” he said. “I also think herd immunity will have an important part of how much confidence we have in terms of travel and economic activity.”

Olney is particularly impressed with how strong the banking industry, which primarily oversaw PPP [Paycheck Protection Program] loan distribution, performed in 2020 despite the difficult conditions.

“The balance sheets, which is what we focus on when it comes to the strength of the banks, the balance sheets are tremendous,” he said. “Capital is strong, the allowance of the loan loss reserves going into 2020 was just okay, but they were built up very strong throughout the last year. I’d say at this point, we have very strong reserves… I think that the local banks here in Arkansas, and even in the region, are all very strong.”

According to the latest data from the Federal Deposit Insurance Corp. (FDIC), Arkansas’ 86 federally insured lenders reported a cumulative net income of $999 million in the third quarter of 2020, down 18% from a year ago. The banks grew their combined assets to $131.14 billion, up 17% year-over-year. Deposits rose to $105.82 billion.

While banks look relatively good on paper, they face daunting challenges headed into 2021, particularly for growth. Olney said various factors would influence this year’s performance.

“I think the expectations of additional stimulus, additional support from the government, I think that’s one thing that we’re looking for that the new administration continues to support the economy and the parts of the economy that need it the most. I believe there are expectations set for additional inflationary pressure with that stimulus. And with that, we’ve seen some yield curve steepening over the last few weeks. With the yield curve steepening, I think that is a positive for the banking industry,” Olney said.

Low interest rates will put pressure on banks to generate interest income. Confirming agency directors in the financial sector will also influence financial institutions’ regulatory obstacles, he said.

Olney also thinks 2021 could lead to a round of mergers and acquisitions (M&A) in the banking industry.

“I think one of the more exciting things that we think we’ll see in 2021 is M&A,” Olney said. “We took a slight pause in 2020 just to make sure the banks’ balance sheets were in good shape, but now that we’ve confirmed bank balance sheets are indeed strong, I think you’re going to see a number of acquisitions – mergers of equals. I think that will rebound very strong in 2021, and that makes it exciting from an investor standpoint.”

Don’t look for this activity in early 2021, Olney says, but expect some M&A activity in the industry in the back half of the year.

“I think there are some interesting bank combinations that we could see as a result, and I think six months from now, we’ll be talking even more about this,” he said.

You can watch his full interview in the video below.