The Acquire or Be Acquired (AOBA) conference provides a crucial lens into the evolving priorities of the banking industry. This year, the discussions went beyond traditional M&A strategies, highlighting the increasing importance of banking balance sheet strategy, technology integration, and the mounting pressures on profitability.

As banks navigate 2024, the ability to manage interest rate fluctuations, optimize capital efficiency, and embrace technological transformation will define their competitive edge. In this analysis, we’ll explore the key challenges and opportunities shaping the future of banking, from balance sheet resilience to the strategic shifts required to maintain long-term growth.

A Subtle Shift in Optimism

This year’s conference reflected cautious optimism. Despite lingering challenges, the mood suggested a light at the end of the tunnel, particularly as bankers looked to the second half of the year.

A crowd poll revealed that 91% of participants felt more optimistic about 2024 compared to 2023, with expectations of potential rate cuts and economic stabilization boosting confidence.

Key Factors Driving Optimism:

• Anticipated rate cuts that could ease funding pressures.
• Increased focus on profitability through operational efficiencies.
• Greater adoption of proven technology solutions to enhance performance.

Balance Sheet Management: The New Star of the Show

Historically, M&A discussions dominated AOBA, but this year, the balance sheet stole the spotlight. Attendees showed heightened interest in how interest rates and fair value accounting affect deal dynamics, profitability, and long-term strategy.

Why Balance Sheets Matter:

• Unrealized losses on bond portfolios, driven by rising rates, have forced banks to reassess their valuation models during M&A.
• Buyers are cautious, with many deals requiring significant adjustments to account for rate-driven asset devaluations.
• EPS accretion has emerged as a critical metric, with some deals showcasing 20% accretion despite initial dilution due to mark-to-market adjustments.

This analytical focus reflects a broader industry shift toward understanding the financial fundamentals underpinning strategic decisions.

Deposits: Stability and Profitability Challenges

Deposit management remains a central concern for banks. While the panic around liquidity seen in early 2023 has subsided, questions about pricing, retention, and profitability dominate discussions.

Key Trends in Deposit Management:

• Banks are prioritizing deposit pricing strategies that balance cost and customer retention.
• Research from S&P suggests that cost of funds may not decrease immediately, even if federal funds rates decline.
• Institutions are leveraging data analytics to improve deposit primacy and customer insights, ensuring a better understanding of account relationships.

This shift reflects a broader emphasis on aligning deposit strategies with long-term profitability and stability.

Technology: From Optional to Essential

For years, technology adoption in banking was seen as aspirational. AOBA 2024 marked a turning point, with many attendees viewing digital transformation as non-negotiable for survival.

Top Technology Priorities:

1. AI Integration: Banks are exploring AI’s potential to enhance efficiency, improve customer experience, and manage risks.
2. Data Quality and Analytics: High-quality data is critical for everything from AI applications to effective decision-making.
3. Efficiency Gains: Banks are adopting technologies that drive cost reductions and operational improvements.

Attendees acknowledged that banks not embracing these innovations today risk falling irreparably behind within the next five years.

The Talent and Succession Challenge

As the banking industry grapples with technological evolution, it faces another pressing issue: talent. With baby boomers retiring in large numbers, banks must address leadership succession, middle management refreshment, and skills gaps in key areas.

Strategies for Addressing Talent Gaps:

• Board Refreshment: Ensuring directors have the knowledge and foresight to guide technological and strategic shifts.
• Upskilling and Reskilling: Equipping employees with the tools and expertise needed for a digital-first banking environment.
• AI Augmentation: Leveraging AI to fill gaps in efficiency and decision-making, complementing human talent.

Balancing technological adoption with a focus on people underscores the interconnected challenges of modernization and workforce management.

M&A: The Thaw Begins

M&A activity has been subdued in recent years due to interest rate volatility and balance sheet constraints. However, a clearer understanding of the metrics driving deals is helping to restore activity.

What’s Driving the Shift:

• Sellers are becoming more realistic about valuations, often accepting below-book offers due to asset devaluations.
• Buyers are focusing on deals with strong EPS accretion, even if initial tangible book value dilution is significant.
• Strategic combinations are seen as a way to navigate regulatory pressures, technology investments, and operational challenges.

Despite these developments, the industry faces lingering questions about how to align deal strategies with long-term growth and resilience.

Looking Ahead: Key Takeaways for 2024

As the banking industry navigates 2024, several themes from AOBA stand out:

1. Balance Sheet Strategy: Banks must prioritize understanding and managing interest rate risks to ensure long-term profitability.
2. Technology as a Standard: Digital transformation is no longer optional. Banks must adopt technologies that enhance efficiency and customer experience.
3. Talent and Leadership: Addressing succession planning and skill gaps is critical for sustaining growth and innovation.
4. M&A Realism: As valuations stabilize, deals will focus on strategic alignment and mutual benefit, with less emphasis on inflated premiums.
5. Flexibility in Uncertainty: Building resilience against market volatility ensures that banks can thrive regardless of rate movements or economic shifts.

Conclusion: A Roadmap for Growth and Resilience

AOBA 2024 showcased the banking industry at a crossroads. From managing balance sheet complexities to embracing mandatory technological transformation, banks are rethinking their strategies to adapt to an evolving landscape. With cautious optimism, the focus is shifting toward sustainable growth, operational efficiency, and the agility to navigate an uncertain future.

As the industry moves forward, the lessons from AOBA offer a roadmap for success—one that balances innovation with pragmatism, ensuring banks remain relevant and resilient in the years to come.