M&A needed to avoid banking crisis, says former deputy PM
Next year will be characterised by an unprecedented wave of consolidation in the US banking sector, the leading Washington-based financial services consultant Yerbol Orynbayev said.
The intervention from the former deputy prime minister of Kazakhstan follows a dip in banking M&A activity in the third quarter of 2023, but Orynbayev believes this will rebound dramatically over the next 12 months as banks are forced to adjust to a new macro-economic environment.
Orynbayev, who once worked as the governor of the World Bank on behalf of Kazakhstan, said changing consumer preferences will inevitably lead to more consolidation as banks will need to operate at significantly larger scale to remain competitive in the modern landscape.
Yerbol Orynbayev said: “With high interest rates suppressing lending income and decreasing asset values, banks must open up new revenue streams as well as protecting existing asset portfolios and adjusting lending strategies.
“To achieve this, they must invest in emerging technology such as AI and ML, digitalise all of their products, and embrace an ecosystem business model to attract new customers and retain existing ones. This requires significant capital and resources, paving the way for banks to explore new deals.”
Community banks and small regional banks will be the first to be consolidated, according to Orynbayev, who believes banks should welcome a new wave of M&A activity as it will help overcome the banking crisis and stabilise the sector.
Regional banks are those with assets between $10 billion and $100 billion, while those with below $10 billion are defined as community banks. As of December 2022, there were 4,001 community banks in the US and 134 regional banks (USA Facts).
Yerbol Orynbayev added: “We’re currently at the top of a wave of new technology and innovation disrupting the banking sector, and smaller players in the market must keep pace with the national banks. Consolidation will give regional banks the data, resources, and digital infrastructure they need to scale their business models and survive the banking crisis.
“Furthermore, a looming recession will also drive consolidation amongst smaller banks, who will struggle to see out the next 12 months on their own.”
Orynbayev said consolidation will also see banks rethink their business models and double down on building customer-focussed ecosystems as a strategy to drive long-term growth.
His prediction follows reports that investment banking revenues could rebound after a slump in M&A in the past 12 months, and comes after US economic growth grew to 4.9% in the third quarter of 2023. However, Orynbayev warned about frailties in the financial sector, and said high interest rates will still lead to a recession.
Orynbayev also added that US regulators need to play a role in encouraging M&A activity in the banking sector, and called for stricter enforcement of rules and for the cap for deposit protection be raised.
Yerbol Orynbayev continued: “Banks will diversify their offering by bundling non-financial services and products with financial services. Consolidation could help these banks forge strategic partnerships with non-financial and lifestyle service providers such as insurance, retail, lifestyle, travel, and telecommunications companies.
“There will be a spike in bankruptcies throughout the corporate sector in 2024, and the companies that will be hit the hardest will be those that borrowed with low interest rates but can’t sustain high interest rates. Furthermore, geopolitical tensions continue to create economic uncertainty around the world and global economies continue to battle high inflation.
“Regulators must find the right balance that promotes healthy competition and safeguards the health of the financial sector, as well as fostering competition and innovation. The realities of the macro-economic environment mean regulators might need to make some tough decisions, and they must be stringent with enforcement to avoid another SVB-like collapse.”