Wall Street banks really needed dealmaking to make a comeback. It may finally be happening.
The volume of US mergers and acquisitions is up 130% so far this quarter, to $288 billion, according to data from Dealogic. Worldwide M&A is up 56%, to $453 billion.
That surge includes three major deals announced this week in the US.
Credit card lender Capital One (COF) said it would acquire rival Discover Financial Services (DFS) for roughly $35 billion. Charlotte-based regional bank Truist Financial (TFC) said it would sell its remaining $15.5 billion stake in an insurance arm. And retailing giant Walmart (WMT) confirmed plans to acquire smart TV maker Vizio (VZIO) for $2.3 billion.
The pacts could mean hundreds of millions in new fees for some of the biggest banks at a time when their traditional lending profits are expected to decline. Morgan Stanley (MS), Goldman Sachs (GS), JPMorgan Chase (JPM), Bank of America (BAC), and Citigroup (C) all had a hand in at least one of the transactions.
That trend "we think will bode well for the balance of the year," Citigroup CFO Mark Mason said Tuesday at a Bank of America Securities conference.
Big banks have been waiting two years for M&A to pick back up again. Last year was supposed to be the year things turned around; instead, 2023 was the worst year for dealmaking in a decade as clients turned cautious about everything from the direction of interest rates to relations with China to the larger US economy.
Investment banking revenue at the five big banks with sizable Wall Street operations fell by an average of 9% last year. The portion of these fees tied to advice given on mergers or acquisitions declined even more, by 21% on average.
Some executives even had to walk back their talk of "green shoots" after the hoped-for surge in deals failed to materialize.
A lot is riding on a Wall Street revival that sticks in 2024. That's because banks expect to see their traditional lending income drop as demand falls and margins get squeezed. The Federal Reserve is expected to begin cutting rates at some point this year, and that could hurt the giant banks that were able to charge a lot more for their loans when rates were higher.
"Loan growth is [a] dog fight right now," Bank of America CEO Brian Moynihan said at a Bank of America Securities conference Wednesday, speaking to commercial borrowing usage by his company’s large corporate clients.
Mason, the Citigroup CFO, added a note of caution about the M&A pickup. Even though "we are seeing a significant increase in announced deals," the number of deals actually closing in the first quarter has "not been that high."
There are many uncertainties still about the prospect for M&A throughout 2024, including what the Fed does on rates and how far the Biden administration goes in its campaign to scrutinize consolidations across a number of industries.
Last month a federal court sided with the Justice Department’s request to block JetBlue’s (JBLU) $3.8 billion acquisition of rival Spirit Airlines (SAVE).
A lot of other mergers also hang in the balance due to antitrust reviews, from the tie-ups of air carriers Alaska (ALK) and Hawaiian (HA) to grocery chains Kroger (KR) and Albertsons (ACI) to amusement park giants Six Flags (SIX) and Cedar Fair (FUN).
"The one thing we can be confident of is that the Biden administration will be tougher on mergers than the Trump administration so if I were trying to pull off a big merger, I'd wait until November," said Cornell Law School professor George Hay.
But clearly, some companies are clearly willing to roll the dice on buying rivals, including Capital One. Its purchase of Discover would create one of the largest US credit card companies and a formidable new rival to American Express (AXP), Visa (V), and Mastercard (MA).
Capital One predicts the deal will close in late 2024 or early 2025 if it gets that regulatory approval.
"We doubt the timing is a coincidence. The deal is unlikely to close before the elections," Ian Katz, a managing director for Capital Alpha Partners, said Tuesday.
"If the Republicans win, approval becomes more likely. We think approval is also possible under Biden-appointed regulators, but the proposed deal will take many months and receive intense scrutiny."
Another regional lender, PNC Financial Services Group (PNC), has also been making some noise about getting bigger as a way of surviving long term. Its CFO, Rob Reilly, made it clear Wednesday that the bank is not that concerned about regulatory pushback.
"We think should an opportunity arise for us ... we think that there would be a large degree of regulatory support under the current setup," said Reilly, noting that he met with acting Comptroller of the Currency Michael Hsu last week.
David Hollerith is a senior reporter for Yahoo Finance covering banking, crypto, and other areas in finance.
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