Increase in banking mergers and acquisitions expected in 2025

The U.S. banking sector is poised for a period of increased consolidations and mergers as concerns about a potential recession diminish and regulators express a more favorable attitude towards deals. This expectation marks a departure from the previous years, where mergers and acquisitions (M&A) within the U.S. banking industry declined from an average of 200 to 300 deals annually to a range of 100 to 150 deals, reflecting a regulatory landscape that had become more stringent.

Manan Gosalia, Head of U.S. Midcaps Banks Research at Morgan Stanley, expressed optimism regarding the future of bank M&A activity, attributing the recent sluggishness to uncertainties stemming from tariff issues. Gosalia anticipates a resurgence in deal-making activities in the latter part of the year as ongoing tariff negotiations reduce overall macroeconomic risks.

Despite a significant reduction in the number of banks in the U.S. by 75% over the past four decades due to consolidation efforts, the banking industry remains highly fragmented, with 4,487 banks in operation as of 2024. Most of these banks have assets totaling less than $10 billion. Gosalia notes that smaller banks are the primary contributors to M&A transactions within the industry, indicating a substantial pool of potential sellers for future consolidations. As such, consolidation is expected to remain a core theme in the industry for years to come due to the numerous benefits associated with M&A activities.

Banks often employ M&A strategies to expand into new markets, acquire new capabilities, and enhance their regional presence, along with gaining access to larger customer datasets to improve their Artificial Intelligence (AI) models. Gosalia emphasizes that investments in technology, products, infrastructure, and branding are crucial for enhancing core deposits. Additionally, scalability allows banks to leverage these investments across a wider revenue base, further underscoring the importance of consolidations within the industry.

Recent signals from regulatory bodies indicate a positive shift in the merger environment. While large acquisitions of U.S. banks with assets exceeding $50 billion have been scarce in recent years due to stringent merger review processes, new administrations have signaled a more flexible approach to regulatory oversight. Agencies like the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC) are relaxing rules for the banking sector, with public statements hinting at a more favorable stance towards bank M&A deals.

Investors in banking stocks are closely monitoring these regulatory developments, as consolidation activities often impact share values in the long run. Despite acquisitions not always resulting in immediate gains for buyers, historical data shows that one year post-acquisition, buyers tend to outperform their peers by a median of 110 basis points. This trend underscores the potential benefits of consolidation in the banking industry.