Major lenders that set aside billions of dollars to cushion against the outbreak's economic fallout don’t yet know the full extent of their losses.
“You wouldn't see a merger spike or tick up, when you're in a recession, until you reach the point of peak charge-offs,” Citizens Bank CEO Bruce Van Saun told FOX Business. “You want to be sure you’re not inheriting somebody else’s problem loans.”
Such was the case during the depths of the financial crisis, when Bank of America paid $4 billion for Countrywide Financial Corp. and its book of toxic mortgages.
Stay-at-home orders aimed at slowing the spread of COVID-19 caused the U.S. economy to shrink at an annualized 37.1% pace in the three months through June, the sharpest slowdown of the post-World War II era. More than 60 million Americans at least temporarily lost their jobs due to the shutdowns.
As the economy plunged into recession, regulators allowed consumers to put their loans in forbearance, or on pause, without accruing interest. Seven percent to 8% of borrowers took advantage of the offer for the first 90-day forbearance period. About half, or 3% to 4%, extended the delay to a second 90-days.
The commercial lending business, meanwhile, is murkier as a number of industries, including retail, hospitality, travel and energy may see permanent changes in customer behavior as a result of the pandemic.
While the economy is powering back up, with Wall Street economists anticipate seasonally adjusted annualized growth of 23.9% in the third quarter, peak charge-offs aren’t expected to occur until the first half of 2021. As a result, Van Saun doesn’t expect to see any banking deals this year.
However, Van Saun concedes the current environment of near-zero interest rates and a flat yield curve makes it challenging for banks to show earnings growth and an improvement in return on equity, which has often “been a catalyst for doing deals.”
Therefore, he said a deal makes sense if it allows the two sides to take out cost overlaps, “drive efficiency and try to improve performance.”
A flurry of deals at the end of 2019 had many on Wall Street expecting this year to be a strong one for M&A in the financial industry.
In May, there was growing speculation Goldman Sachs Group was looking to make an M&A splash after SunTrust Banks Inc. and BB&T Corp. in December announced a $66 billion tie-up that created Truist Financial Corp., the sixth-largest U.S. bank.
Goldman was said to have its sights set on a major commercial bank with its shortlist including Wells Fargo & Co., PNC Financial Services Group and U.S. Bancorp.
Deal-making in other industries, meanwhile, is picking up steam.
Nvidia agreed on Monday to buy SoftBank Group’s Arm Holdings for $40 billion, Gilead Sciences Inc. announced a $21 billion merger with Immunomedics Inc. and Verizon Communications Inc. secured a $6.25 billion transaction for America Movil SAB’s wireless phone reseller Tracfone.
The deals, typical of the "Merger Mondays" more often seen on Wall Street before the pandemic, are a sign of business confidence in the economic recovery and lay the groundwork for a future burst of activity in the banking sector.
“There's a catalyst in the environment that could result in a higher level of activity,” Van Saun said. “But I don't think that happens this year just because we're still in the recession and we're still managing their credit costs.”