Analysis: US banks pounce on fintech deals as valuations plunge

NEW YORK, Nov 17 (Reuters) – Fintech companies long seen as a threat by JPMorgan Chase & Co (JPM.N)increasingly becoming acquisition targets for mainstream US banks as rising interest rates and falling valuations curb their expansion.

Valuations of listed fintech companies have fallen 70% in 2022, Jefferies Group analysts said in a note last week. Over the same period, S&P 500 bank valuations are down 33%, while S&P 500 valuations (.SPX) are down 23%, according to data from Refinitiv IBES.

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The drop presents an opportunity for Main Street banks to buy businesses and bolster their technology for digital banking, online payments and other financial services and to diversify beyond lending.

Huntington Bancshares Inc (HBAN.O) is one of these banks. The Columbus, Ohio, regional bank is looking for other targets after it bought payments fintech Torana in May.

“We can buy more on the payments side,” Huntington CEO Steve Steinour told Reuters in an interview.

Investors have dumped fintech stocks this year alongside other tech stocks, which perform best when economic growth is strong. As the United States tips into a potential recession and interest rates rise, the outlook for fintechs has eroded. The highly publicized explosion of crypto exchange FTX last week also rattled confidence.

“With valuations falling and the IPO and SPAC markets drying up right now, there’s definitely a lot more room for acquisitions by traditional banks in fintech,” said Dan Goerlich, partner at PwC which focuses on financial transactions.

The renewed interest contrasts with previous years, when finance chiefs were reluctant to acquire companies they considered overvalued, he said.

The losses for the year were considerable. For example, shares of Affirm Holdings (AFRM.O), which offers buy-it-now and pay-later services, have fallen around 85% this year. Personal finance firm Dave Inc (DAVE.O) plunged almost 97%.

Affirm declined to comment. Dave did not immediately respond to a request for comment.

Startup founders may come under more pressure to strike deals as it becomes more expensive to run their businesses. Investors have been intensely focused on rising funding costs, Jefferies analyst John Hecht wrote in a note.

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JPMorgan CEO Jamie Dimon has been warning for a decade that Silicon Valley is coming to eat the banks’ lunch. At that time, fintechs flourished as customers and businesses embraced digital financial services. Pandemic lockdowns accentuated the trend as everyone moved online. Even so, price growth has stalled this year as the economic outlook has darkened.

Aiming to meet the challenge, the largest US lender bought. In September, JPMorgan agreed to acquire Renovite Technologies Inc, a cloud-based payments technology company, the latest in a series of deals worth $5 billion over the past 18 months.

PNC Financial Services Inc (PNC.N) in September bought Lingaa fintech focused on restaurant operations and sales.

“You will see an explosion of transactions” over the next year and a half, said Michael Abbott, head of global banking at Accenture.

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Large lenders have many reasons for entering into agreements. Falling fintech valuations coincide with banks earning more from traditional lending as interest rates rise.

Fintech deals may be easier to close than bank mergers, which have been delayed by regulators’ scrutiny.

“Management teams and boards have shifted some of their focus to non-banking opportunities,” said Brennin Kroog, managing director of the financial institutions group at Lazard. These include digital tools for wealth or cash management and point-of-sale financing.

Fintech deals allow banks to buy new technologies or products instead of developing them in-house. Acquisitions can also be defensive moves into other businesses outside of lending, such as travel services.

Not every seller will find a buyer. Some banks have shunned buy-now-pay-later firms, due to concerns about their loan portfolios and the possibility of regulation. Crypto providers were already seen as unattractive due to regulatory uncertainty, even before FTX collapsed.

Even with better terms, closing deals is not easy.

PNC, based in Pittsburgh, Pennsylvania, reviewed more than 50 potential acquisitions this year and finally landed on one company, CEO Bill Demchak told Reuters. However, as “valuations have come down a lot, our level of activity could 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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