Regulatory Changes and Their Impact on M&A Activity in Banking

Current Regulatory Landscape and Key Regulations

The current regulatory landscape in banking is characterized by heightened oversight and evolving capital requirements. Major banks like Wells Fargo, Bank of America, Goldman Sachs, JPMorgan Chase, and Citigroup are actively adapting to these changes, emphasizing the need for compliance and proactive investment in regulatory processes to navigate potential M&A impacts.

"While we see clear forward momentum, it's up to our regulators to make their own judgments and decide when the work is done to their satisfaction.Progress has not been easy, but tens of thousands of my partners at Wells Fargo have now worked tirelessly for years to deliver the kind of change necessary for a company of our size and complexity, and we will not rest until we satisfy the expectations of our regulators and the high standards we have set for ourselves.While we have made substantial changes and have meaningfully improved our control environment, the industry operates in a heightened regulatory oversight environment, and we remain at risk of further regulatory actions." --- (WFC, earning call, 2024/Q2)

"So it's a really important business for us. We've been we've targeted some countries where we want to look at the regulatory framework opportunities and crowd in more resources to really be best in class and anticipate some of the new regulations that are coming in other countries to make sure that we're fit and ready for that as well." --- (BAC, conference, 2024/05/08)

"Statements about our target ROE, ROTE and CET1 capital ratio, and how they can be achieved, are based on our current expectations regarding the capital requirements applicable to us and are subject to the risk that our actual capital requirements may be higher than currently anticipated because of, among other factors, changes in the regulatory capital requirements applicable to us resulting from changes in regulations, including as a result of the July 2023 proposal to revise the U.S. bank regulatory capital rules, or the interpretation or application of existing regulations or changes in the nature and composition of our activities." --- (GS, sec filing, 2024/Q1)

"And looking forward, we expect loss rates to be relatively stable. Lastly, let's look at the changing regulatory environment.As you can see from the page, the industry is facing an onslaught of regulatory and potential legislative change." --- (JPM, event transcript, 2024/05/20)

"But we recognize there are places where progress has been too slow. So we have intensified our efforts in areas such as regulatory processes and the related data remediation.We will continue to be purposeful and disciplined about investments across the franchise, and we are fully committed to spending what is necessary to meet our regulatory obligations." --- (C, event transcript, 2024/06/18)

Impact of Regulations on Deal-Making Strategies and Competition

Regulatory changes significantly influence deal-making strategies and competition in banking. Firms like Wells Fargo and PNC emphasize adapting to these developments to enhance earnings and maintain competitive positioning, while JPMorgan Chase highlights ongoing adjustments to operations in response to the evolving regulatory landscape.

"But externally, investors are clearly spending much more time evaluating the different potential sources of earnings or return uplift once these regulatory restrictions are eliminated, whether it's deposit recapture, growth in trading book and reduction in that elevated risk and control spend." --- (WFC, earning call, 2024/Q1)

"Legal and regulatory developments could have an impact on our ability to operate our businesses, financial condition, results of operations, competitive position, reputation, or pursuit of attractive acquisition opportunities." --- (PNC, press release, 2024/07/16)

"Each of these factors will affect the performance of the Firm. The Firm will continue to make appropriate adjustments to its businesses and operations in response to ongoing developments in the business, economic, regulatory and legal environments in which it operates." --- (JPM, sec filing, 2024/Q2)

"These factors also may have an adverse impact on our ability to achieve our strategic objectives." --- (MS, sec filing, 2024/Q1)

"While we view our work here as a long-term commitment, we expect to see results in the short and medium term and are encouraged by the improved performance we've already seen with strong growth in investment banking fees during the first half of the year. In our Wealth and Investment Management business, we have substantially improved advisor retention and have increased the focus on serving independent advisers and our consumer banking clients, which should ultimately help drive growth." --- (WFC, earning call, 2024/Q2)

Historical Impact of Regulations on M&A Activity

Regulatory changes have historically influenced M&A activity in banking by affecting capital requirements and operational constraints. While regulations create headwinds, fundamental industrial logic should drive M&A decisions. Recent adjustments in capital requirements may alleviate some constraints, potentially fostering a more favorable environment for future mergers and acquisitions.

"Under instantaneous upward parallel shifts, the near-term adverse impact to Basel 3 capital would be reduced over time by offsetting positive impacts to net interest income generated from banking book activities." --- (BAC, sec filing, 2024/Q2)

"As I've noted, there are some headwinds, I think particularly in M&A, but over time, you would hope that the amount of M&A is a function of the underlying industrial logic rather than the regulatory environment." --- (JPM, earning call, 2024/Q1)

"I've talked about this that historically, it's one of the most impacted franchises that we've had, not just because of the customer base that actually reads about all the issues that we've had historically, But if you're an advisor and you're talking to your customers, at some point, you're going to get tired of having to explain about all these things that are in the paper." --- (WFC, conference, 2024/05/29)

"We expect our regulatory capital requirement to decrease to 12.1% as of October 1, which incorporates the reduction in our stress capital buffer from 4.3% to the indicative SCB of 4.1% we announced a couple of weeks ago." --- (C, earning call, 2024/Q2)

"So that hopefully will come out in the Washington side. I just don't know I don't know how they're going to adjust the calculation, but it's needed because otherwise you have a constraint on the size of these very important institutions relatively they have to get smaller relative to the economy in some ways to keep the Q2 constant or keep adding more capital for the same risk even though the nominal dollars are higher in a relative basis." --- (BAC, conference, 2024/09/10)

Future Outlook for M&A in Banking

The future outlook for M&A in banking appears cautious, with sentiment among corporate clients showing resilience despite a flat trend in current activity. Increased M&A transactions are expected to drive financing needs, while regulatory factors, including the upcoming U.S. Elections, may influence corporate appetite for deals.

"Just give us a sentiment check of when you're talking to your corporate clients, like how resilient do you see the investment banking sort of trends and the sort of desire and appetite for corporates to engage in either DCM, ECM or M&A, large M&A activity as we look into sort of later in the year into the U.S." --- (MS, earning call, 2024/Q1)

"But as a general matter, when there are more M&A transactions, whether with financial sponsors or big corporates, there is more financing attached to that." --- (GS, earning call, 2024/Q2)

"We now have more than 200 regional bankers across the country to better serve our commercial clients, and they complement our industry coverage to our corporate clients. In our global markets business, we continue to extend balance sheet to our clients in adding expertise and talent to continue to lead our market share improvements seen over the last several years." --- (BAC, earning call, 2024/Q2)

"So M and A this quarter has been sort of flattish overall. But overall banking fees will be around 15% plus minus up." --- (JPM, conference, 2024/09/10)

"Just give us a sentiment check of when you're talking to your corporate clients, like how resilient do you see the investment banking sort of trends and the sort of desire and appetite for corporates to engage in either DCM, ECM or M&A, large M&A activity as we look into sort of later in the year into the U.S. Elections?" --- (MS, earning call, 2024/Q1)

Case Studies of Recent M&A Transactions

Recent M&A activity in banking has surged, with Truist Financial reporting record M&A fees and strong performance in capital markets. Citigroup emphasizes its role in facilitating M&A and corporate restructuring, highlighting the sector's robust engagement in strategic transactions.

"First, we saw a significant increase in investment banking and trading revenue, driven by strong performance across much of our capital markets platform with particular strength in M&A and equity capital markets." --- (TFC, earning call, 2024/Q1)

"These three products sum up our comprehensive platform for investors. And finally, in Issuer Services, we facilitate fundraising for working capital as well as strategic capital needs for M and A and corporate restructuring transactions." --- (C, event transcript, 2024/06/18)

"In the first quarter, we had one of the highest M&A fees in our company's history, so that sort of changed -- impacted that a bit." --- (TFC, earning call, 2024/Q2)

"for investors. And finally, in Issuer Services, we facilitate fundraising for working capital as well as strategic capital needs for M and A and corporate restructuring transactions." --- (C, event transcript, 2024/06/18)

Sector-Specific Regulatory Challenges

Sector-specific regulatory challenges in banking are significant, as highlighted by executives. They emphasize the need for effective regulatory responses to ensure M&A success, the importance of robust controls and reporting, and the differing perceptions of regulators towards various entities involved in M&A, such as private credit versus traditional banks.

"We commend the bank for setting these goals, but their success may depend on policy and regulatory response to the transition." --- (BAC, event transcript, 2024/04/24)

"Is that really the scope of what you need to fix? Because people see this externally and say, hey, you're failing in terms of overall controls and resiliency, but I think I hear you saying it's really more about just the data and the regulatory reporting, which is important, but more of a slice of a broader picture. Is that correct?" --- (C, earning call, 2024/Q2)

"And as part of that, do you think the regulators are going to view private credit as a different party and less attractive party versus bank takeovers of failed banks? That's my question." --- (JPM, earning call, 2024/Q1)

"We don't have to worry about -- in fact, then to regulatory capital flowing through." --- (BAC, earning call, 2024/Q2)

Global Regulatory Trends Affecting U.S. Banking M&A

Global regulatory trends are significantly influencing U.S. banking M&A activity, as banks like Citigroup emphasize compliance with regulatory expectations, while HSBC adjusts models based on recent crises. Deutsche Bank highlights its M&A support amid evolving regulations, indicating a responsive and adaptive banking landscape.

"And we raised our global ranking from the 11th to the seventh business continued to support clients through its multifaceted product offering, including M&A, sell side advice as well as debt issuance linked to the partnership between Grant Thorton and New Mountain Capital, fixed income and currency revenues were up 3% year on year, supported by a 7% increase in financing revenues even compared to a strong prior year period." --- (DB, earning call, 2024/Q2)

"I'm not sitting here saying it is systemic. It's growing rapidly. Anything that's growing that rapidly. If you look at almost every major financial crisis, there was new financial products often around real estate, but new financial products almost every single time." --- (JPM, Investor Day, 2024/05/20)

"313   299 Non-U.S. government securities 24   21 Total Average Global Liquidity Sources $ 909   $ 897 Our GLS are substantially the same in composition to what qualifies as High Quality Liquid Assets (HQLA) under the final U.S." --- (BAC, sec filing, 2024/Q1)

"We take this feedback from our regulators very seriously and we're committed to allocating all the resources necessary to meet their expectations. Now, turning back to the quarterly results." --- (C, earning call, 2024/Q2)

"And the reason we adjusted this probability for default model for banks is because we wanted to factor in some of the observations and learnings from the March 2023 crisis in the way governments have supported the bank resolution, that's specifically true for the U.S. and Switzerland." --- (HSBC, earning call, 2024/Q2)