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BANKING ON MORE MERGERS AND ACQUISITIONS IN 2022

While the pandemic slowed deal activity, the stage is set for deal making in
2022, we examine several trends that could reshape the banking ecosystem and
likely provide a tailwind to bank stocks over the years to come.

January 2022

 * David Ellison
   Portfolio Manager
 * Ryan C. Kelley, CFA
   Chief Investment Officer and Portfolio Manager

We believe the pandemic has forced the hands of many banks—especially midsize
and regional lenders—that have failed to adapt their business models quickly
enough to the demands of today’s customer.

Furthermore, a new class of disruptive, digitally driven “fintech” competitors
has emerged. Those traditional lenders unable to invest in an organic technology
transformation will increasingly be faced with the prospect of partnering,
acquiring, or being acquired by these fast-growing technology-forward platforms.

Below, we examine several trends that could reshape the banking ecosystem and
likely provide a tailwind to bank stocks over the years to come.


KEY TAKEAWAYS

»    A challenging earnings environment and thin net interest rate margins will
fuel the “bigger is better” mentality.
»    A priority for many banks is reducing their physical footprint.
»    Many larger banks plan to develop native digital capabilities, form joint
ventures, or acquire fintech platforms that can harness the benefits of existing
scale while delivering a better digital customer service experience.  


BANK DEALS ARE TRENDING

Unions of equal and tuck-in acquisitions have continued to motivate lenders to
consolidate in search of cost synergies and other economy of scale benefits. A
challenging earnings environment characterized by relatively slow loan growth
and thin net interest rate margins will only fuel the “bigger is better”
mentality. Of course, the largest money center banks were constrained in their
acquisition efforts in 1994 when Congress barred large banks with greater than
10% of the country’s deposits from making acquisitions. 

According to S&P Global Market Intelligence, 208 bank and thrift mergers with an
aggregate deal value of $77.5 billion had surfaced through December 20, 2021, up
from $28.1 billion in 2020 (when most banking activity stalled due to the
pandemic) and $58.4 billion in 2019. U.S. bank and thrift M&A aggregate deal
value in 2021 has already surpassed the highest level since before the global
financial crisis, and S&P expects bank M&A activity to be as robust in 2022,
reaching at least $60 billion. 



We believe traditional merger rationales will persist and be accompanied by more
strategic deals focused primarily on building incremental technology
capabilities that will augment the digital customer experience across account
management, lending, and ancillary businesses such as wealth management and
payments. 


ADDITION THROUGH SUBTRACTION 

Reducing a costly physical footprint is a priority for many banks evolving their
customer service experience. As more banking services become digitized and
initiated online and through mobile applications, banks will increasingly
reorient away from costly physical bank branches. 

Federal Deposit Insurance Corporation (FDIC) bank branches have dwindled from a
high of 85,566 branches as of year-end 2009 to 74,935 branches in 2020. Over the
last seven years, branch closures have consistently grown. We expect this
trend to continue through the end of the decade and ultimately serve as a margin
tailwind for banks able to successfully transition online.




DIGITAL TRENDS DRIVING DEALS 

Like almost every aspect of modern life, banking is becoming more digitized by
the day, and the pandemic accelerated this trend as in-person transactions
became associated with risk-taking for some consumers. During the pandemic, 75%
of U.S. adults indicated that they planned on using their mobile devices for
banking following the lifting of everyday in-person restrictions.  



Generational differences in digital dependence will only accelerate mobile and
online adoption. Consumers in the Millennial and Generation Z age ranges are
increasingly relying on mobile-only interactions. According to the Chase Digital
Attitudes Banking Study1, today, 99% of Gen Z and 98% of Millennials are relying
on a mobile banking app to view account balances, check credit scores, and
deposit checks. 


DEAL STRATEGY 

While some larger banks have been actively pursuing opportunities to develop
native digital capabilities (essentially disrupting themselves), some will
partner and form joint ventures while others will opt to acquire fintech
platforms that can harness the benefits of existing scale (across retail and
commercial clients) while delivering on a better digital customer service
experience.  

Conversely, for fintech companies that have scale and achieved lofty valuations,
the strategy going forward will increasingly be focused on acquiring smaller
bank charters to compete more directly and fall under a traditional regulatory
framework. The following six deals have been announced in 2021:   




BENEFITS OF ACTIVE MANAGEMENT WITHIN THE FINANCIALS SECTOR 

With bottom-up research, we seek to own a select group of companies that we
believe offer the best opportunity within the Hennessy Large Cap Financial Fund
and Hennessy Small Cap Financial Fund’s universe of 400-500 investable
companies. The Funds maintain highly concentrated, high conviction portfolios,
which may provide our investors the opportunity to outperform the overall
sector.

 * In this article:
 * Financials
 * Large Cap Financial Fund
 * Small Cap Financial Fund

1 CNBC.com

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YOU MIGHT ALSO LIKE

 * Sector Highlight
   
   
   DIGITAL TRANSFORMATION OF BANKS
   
   David Ellison
   Portfolio Manager
   Ryan C. Kelley, CFA
   Chief Investment Officer and Portfolio Manager
   
   New and innovative technology is changing just about every industry, and the
   Financials sector is no exception. In this Sector Highlight, we examine the
   digital transformation trends in the banking industry and how banks are
   embracing technology to adapt to consumer demands and boost growth in revenue
   and profitability.
   
   Read the Sector Highlight ArrowRight
 * Sector Highlight
   
   
   BANKING ON CONTINUED GROWTH
   
   David Ellison
   Portfolio Manager
   Ryan C. Kelley, CFA
   Chief Investment Officer and Portfolio Manager
   
   Despite exceptional YTD performance, Financials sector stocks are trading at
   a historically low relative discount to the market. The banking industry is
   healthy, and a number of catalysts, including robust M&A activity, higher
   interest rates, and accelerated loan growth, could push bank stocks higher.
   
   Read the Sector Highlight ArrowRight
 * Portfolio Perspective
   
   
   OPPORTUNITIES FOR GROWTH IN THE FINANCIALS SECTOR
   
   David Ellison
   Portfolio Manager
   Ryan C. Kelley, CFA
   Chief Investment Officer and Portfolio Manager
   
   Portfolio Managers Dave Ellison and Ryan Kelley discuss performance and
   valuations within the Financials sector, buybacks, record merger and
   acquisition activity, and how investors may be underestimating the
   attractiveness of investing in banks.
   
   Read the Commentary ArrowRight


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Hennessy Funds
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Novato, CA 94945
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The Funds' investment objectives, risks, charges, and expenses must be
considered carefully before investing. The prospectus contains this and other
important information about the investment company. Please read it carefully
before investing. A hard copy of the prospectus can be requested by calling
1-800-966-4354.

Performance data quoted represents past performance; past performance does not
guarantee future results. The investment return and principal value of an
investment will fluctuate so that an investor's shares, when redeemed, may be
worth more or less than their original cost. Current performance of the Fund may
be lower or higher than the performance quoted and can be found here. Neither
forward earnings nor earnings growth is a measure of a fund’s future
performance.

Mutual fund investing involves risk. Principal loss is possible. Small and
medium-capitalization companies may have more limited liquidity and greater
price volatility than large-capitalization companies. Investments in foreign
securities may involve greater volatility and political, economic, and currency
risk and differences in accounting methods. The Focus, Total Return, Balanced,
Large Cap Financial, Small Cap Financial, and BP Midstream Funds are considered
non-diversified funds. A non-diversified fund, which may concentrate its assets
in fewer individual holdings than a diversified fund, is more exposed to
individual stock volatility than a diversified fund. A fund that concentrates
its investments within one country, one sector, or a small group of industries,
such as Japan, Technology, Financials, or Energy, may be subject to a higher
degree of risk. Investments in debt securities typically decrease in value when
interest rates rise. The risk is greater for longer-term debt securities.
Investments in lower-rated and non-rated securities present a greater risk of
loss to principal and interest than higher-rated securities. Mortgage- and
asset-backed securities are subject to prepayment risk, which is the risk that
the borrower will prepay some or all of the principal owed to the issuer. Funds
that invest in pooled investment vehicles (including ETFs) may experience higher
fees. The formula-based strategy employed by some Funds may cause those Funds to
buy or sell securities at times when it may not be advantageous.

Master Limited Partnerships (MLPs) and MLP investments have unique
characteristics. A Fund does not receive the same tax benefits as a direct
investment in an MLP.

The prices of MLP units may fluctuate abruptly and trading volume may be low,
making it difficult for a Fund to sell its units at a favorable price. MLP
general partners have the power to take actions that adversely affect the
interests of unit holders. Most MLPs do not pay U.S. federal income tax at the
partnership level, but an adverse change in tax laws could result in MLPs being
treated as corporations for federal income tax purposes, which could reduce or
eliminate distributions paid by MLPs to the Fund. If the BP Energy Transition
Fund’s MLP investments exceed 25% of its assets, it may not qualify for
treatment as a regulated investment company (“RIC”) under the Internal Revenue
Code (“Code”), and the Fund would be taxed as an ordinary corporation, which
could substantially reduce its net assets and its distributions to shareholders.
The BP Midstream Fund is treated as a regular corporation, or “C” corporation,
for U.S. federal income tax purposes, and therefore, is subject to U.S. federal
income tax on its taxable income at the graduated rates applicable to
corporations (currently a maximum rate of 21%) as well as state and local income
taxes. The BP Midstream Fund will not benefit from current favorable federal
income tax rates on long-term capital gains, and Fund income and losses will not
be passed on to shareholders. The BP Midstream Fund accrues deferred income
taxes for future tax liabilities associated with the portion of MLP
distributions considered to be a tax-deferred return of capital and for any net
operating gains as well as capital appreciation of its investments. This
deferred tax liability is reflected in the daily NAV, and as a result, the
Fund’s after-tax performance could differ significantly from the underlying
assets even if the pre-tax performance is closely tracked.

Glossary of Terms contains definitions and additional information.

To view the top 10 holdings of a Fund, please click the Fund name: Cornerstone
Growth, Focus, Cornerstone Mid Cap 30, Cornerstone Large Growth, Cornerstone
Value, Total Return, Equity and Income, Balanced, BP Energy Transition, BP
Midstream, Gas Utility, Japan, Japan Small Cap, Large Cap Financial, Small Cap
Financial, Technology. Fund holdings are subject to change and not
recommendations to buy or sell any security.

Opinions expressed are subject to change at any time, are not guaranteed, and
should not be considered investment advice.

News and Media Page:

To view the Morningstar ratings for the Japan Fund, please click here. (Media -
TD Ameritrade)

To view the Morningstar ratings for the Focus Fund, please click here. (Media -
CNBC-B. Macualey).

1 USD = 105.36 Yen as of 07/27/2020 (Media - Ticker - M. Takeda)

Tom White is a TD Ameritrade Network contributor and is not affiliated with the
Hennessy Funds. Content is not investment advice, or a recommendation of any
security, strategy, or account type. Options involve risks and are not suitable
for all investors as the special risks inherent to options trading may expose
investors to potentially rapid and substantial losses.(Media - TD
Ameritrade-Rothberg)



To view the Morningstar ratings, please click here.

The Hennessy Funds are offered only to United States residents, and information
on this web site is intended only for such persons. Nothing on this web site
should be considered a solicitation to buy or an offer to sell shares of any
Hennessy Fund in any jurisdiction where the offer or solicitation would be
unlawful under the securities laws of such jurisdiction.

Quasar Distributors, LLC, Distributor.

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 * Insights DropdownArrow
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    * Topic
    * Overall Market
    * Domestic Equity
    * Energy
    * Financials
    * Japan
    * Multi Asset
    * Technology
   
   Featured Insights
   25 Years of a Focused Approach
   The Portfolio Managers discuss how the Focus Fund has rewarded investors over
   25 years. They also share their current outlook.
   Natural Gas and the Energy Transition
   We believe natural gas plays a role as an essential bridge to a more
   sustainable and reliable energy future and will help meet increased demand.
 * People DropdownArrow
    * Meet the Team
    * Portfolio Management
    * Chief Market Strategist
    * Client Services
    * Business Management
   
   Meet Our Portfolio Managers
   Our Managers average over 20 years of investing experience.
   Meet Neil J. Hennessy
   As Chief Market Strategist, Neil delivers powerful market and economic
   insights.
   Meet Masakazu Takeda
   Based in Asia, Masa is a recognized expert on investing in Japan.
 * About DropdownArrow
    * Firm Overview
    * Investment Philosophy
    * Invest With Us
    * Shareholder Forms
   
   OUR HISTORY
   Since our founding, our priority has been meeting shareholders' needs.
   HOW WE INVEST
   High-conviction strategies, managed for long-term results.
   REQUEST AN INVESTMENT KIT
   We look forward to the opportunity to work together.
 * News DropdownArrow
    * News & Press Center
    * Media Coverage
    * Press Releases
   
   TD Ameritrade - "Energy Sector Funds: GASFX and HNRGX"
   TD Ameritrade - "Stock Picks: CarMax (KMX), Restoration Hardware (RH)"
   TD Ameritrade - "Forecasting 2022 Performance For Financials"

 * Hennessy Advisors
 * My Account
 * Contact
 * Search Search
   Search Search
   


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