NEW YORK, Nov 17 (Reuters) – Financial technology companies, long seen as a threat by the likes of JPMorgan Chase & Co ( JPM.N ), are increasingly becoming takeover targets for traditional U.S. banks as rising interest rates and falling valuations limit them. development.
Valuations of listed financial technology firms have plunged 70% in 2022, analysts at Jefferies Group said in a note last week. During the same period, valuations of banks in the S&P 500 fell 33%, while valuations for the S&P 500 (.SPX) fell 23%, according to data from Refinitiv IBES.
The downturn gave Main Street banks an opportunity to buy companies and improve their technology for digital banking, online payments and other financial services and diversify beyond lending.
Huntington Bancshares Inc (HBAN.O) is one such bank. The Columbus, Ohio-based regional bank is looking for more targets after it bought Torana, a payments fintech, in May.
“We may be buying more in terms of payments,” Huntington CEO Steve Steinour told Reuters in an interview.
Investors have dumped fintech stocks this year along with other technology stocks, which perform better when economic growth is strong. With the US headed for a potential recession and interest rates rising, the outlook for fintech has eroded. The high-profile rise of crypto exchange FTX last week has also shaken confidence.
“With valuations down, and the IPO and SPAC markets all dry at the moment, there’s certainly more room for acquisitions by traditional banks into fintech,” said Dan Goerlich, a partner at PwC who focuses on financial deals.
The renewed interest contrasts with previous years, when finance chiefs balked at acquiring companies they saw as too overvalued, he said.
Losses this year are very high. For example, shares of Affirm Holdings (AFRM.O), which offers buy-now pay-later services, have fallen about 85% this year. Personal finance firm Dave Inc (DAVE.O) has plunged nearly 97%.
Affirm declined to comment. Dave did not immediately respond to a request for comment.
Startup founders may be under more pressure to do deals because it’s getting more expensive to run their companies. Investors have become very focused on rising funding costs, Jefferies analyst John Hecht wrote in a note.
JPMorgan CEO Jamie Dimon has been warning for a decade that Silicon Valley is coming for the banks’ lunch. In that time, fintech has evolved as customers and businesses embrace digital financial services. Pandemic restrictions hit the trend as everyone moved online. Even so, price increases stalled this year as the economic outlook darkened.
Aiming to meet the challenge, the largest US lender has bought. In September, JPMorgan agreed to acquire Renovite Technologies Inc, a cloud-based payments technology company, the latest in a string of $5 billion deals over the past 18 months.
PNC Financial Services Inc (PNC.N) in September bought Linga, a fintech focused on restaurant operations and sales.
“You’re going to see a boom in deals” over the next year and a half, said Michael Abbott, global banking leader at Accenture.
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Large lenders have many reasons for canceling agreements. The decline in fintech valuations coincides with banks earning more from traditional lending businesses as interest rates rise.
Fintech deals may be easier to pull off than bank mergers, which have been delayed by scrutiny from regulators.
“The management team and board have shifted some of their focus to non-bank opportunities,” said Brennin Kroog, managing director in the financial institutions group at Lazard. That includes digital tools for wealth management or treasury and point-of-sale financing.
Fintech offerings allow banks to purchase new technologies or products instead of developing them internally. Acquisitions can also be defensive moves into other businesses outside of lending, such as travel services.
Not all sellers will find buyers. Some banks have shunned buy-now, pay-later companies amid concerns about their loan portfolios and possible regulation. Crypto providers have been considered unattractive due to regulatory uncertainty, even before the fall of FTX.
Even with better conditions, attractive offers are not easy.
PNC, based in Pittsburgh, Pennsylvania, looked at more than 50 potential acquisitions this year and finally landed on one firm, CEO Bill Demchak told Reuters. However, since “ratings have gone down, our activity level may be higher,” he said.
Reporting by Saeed Azhar and David French in New York; Additional reporting by Niket Nishant in Bengaluru; Editing by Lananh Nguyen and Anna Driver
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