M&A in the banking sector: Key themes for 2025

Although a few notable bank M&A transactions made a headline in 2024, if not quite the finishing line, it proved more of a “steady as she goes” year from a bank M&A perspective. That has seen many commentators speculate that 2025 will see a rebound in the overall volume, if not value, of bank deals. Below are five key themes that might factor in the outcome for 2025.

Too big to fail v too small to thrive

While the too big to fail players may consider large-scale cross-border mergers to be out of favour for the moment, banks at the smaller end of the spectrum will continue to face headwinds to organic growth, not least from regulators remaining nervous about operational risks associated with accelerated expansion and the potential to apply discretionary capital add-ons as a result. 

A compelling “growth story” remains elusive for many of these banks and their boards will come under pressure to use M&A as a way to not only bolster the “growth story” but also solve, or at least mitigate, a number of issues that come with being sub-scale in a highly regulated industry with significant compliance costs. 

Even if regulators are accommodative of this ambition however, another challenge for those boards will be to avoid the hunter becoming the hunted as larger institutions continue to look for consolidation opportunities in that segment of the market.            

Private credit partnerships 

Will the Financial Stability Board’s December 2024 consultation report on non-bank financial intermediation (NBFI) leverage have a cooling effect on the recent trend in private credit fund link-ups with banking groups? This seems unlikely. The regulatory environment will remain favourable to NBFIs, at least in the short to medium term. When coupled with the potential regulatory capital impacts of the EU’s revised Capital Requirements Regulations III framework on certain asset classes for banking groups, it seems safe to assume that conditions for these types of partnerships, and transactions like them, will remain appealing.

EU IPU regime

The November 2024 list published by the European Banking Authority identifies eight non-EU banking groups that have so far registered an intermediate EU parent undertaking (IPU), two of which have registered a second IPU. 

Is there a risk that some non-EU banking groups with two institutions in the EU might be discouraged from M&A for EU banking assets to stay below the  €40 billion assets threshold? That certainly seems a risk. The corollary of this, however, is that EU banking groups may see an opportunity to pick up banking assets from those non-EU institutions that may be approaching this level. 

Further, a growing number of synthetic and non-synthetic structures developing that may give such non-EU banking groups a genuine alternative route to maintaining growth in these circumstances. Related to the IPU regime are the new restrictions introduced under the Capital Requirements Directive VI (CRD VI) for cross-border banking business along with the capital and booking model requirements which will require international banking groups to revisit and potentially restructure their existing EU footprint. 

“Live” debt books

Secondary debt market deals, particularly in the non-performing loans space, will likely continue in the relatively benign manner seen in 2024. 

However, as banks continue to focus on cost to income ratios and the need to maximise exit values, the trend to “live books” may become more prevalent. 

A key value enhancer in any significant secondary portfolio trade is the ability to continue to originate the book and create value in the “pipeline”. 

While “live book” sales bring a number of additional complexities in the M&A context, including anti-trust issues, automatic transfer of employees and tax to name a few, the additional value generation that these structures can bring for the selling banking groups may be a driving factor in the frequency of these structures in 2025.  

Strengthening of US financial sector 

Will the positive turn in the performance of US bank stocks result in the dam breaking for US bank M&A? 

Regulatory hurdles to bank mergers should generally be lower with the new administration. Over the past few years, stock valuations have made it extremely difficult for buyers and sellers to meet on an agreed value. With the rebound in prices of US financial institutions, lower costs for acquisition financing, and nearly 4,000 commercial banks operating in the United States, it seems likely that 2025 will see a significant increase in deal volume.  

The US bank M&A market may not prove quite as attractive to non-US acquirors, however, for a variety of reasons. Many non-US banks may face headwinds in the US market due to recent regulatory difficulties, and while the new regulatory framework should in general be more relaxed, the relaxation may not be as pronounced for prospective non-US acquirors.  

Nevertheless, it could be an appropriate time for non-US banks seeking a foothold in the US market through a Federal Deposit Insurance Corporate-insured bank subsidiary to take a closer look at the potential opportunities.