Regional banks at the center of the recent financial turmoil are increasingly striking deals to strengthen their balance sheets and stay competitive, fueling a trend of consolidation that could draw regulatory attention. According to Dealogic, these banks, typically holding assets ranging from $10 billion to $100 billion, have closed 38 transactions this year, up from 29 in the same period last year. A Reuters analysis using LSEG's StarMine M&A data suggests that over two-thirds of the lenders listed in the KBW Regional Banking Index have a greater than 50% likelihood of being acquired within the next year.
The regional banking industry is under significant strain due to rising interest rates, which have reduced loan demand, intensified deposit competition, and increased losses on commercial real estate loans. Macrae Sykes, a banking portfolio manager at Gabelli Funds, noted that consolidation is necessary for regional banks to remain competitive, given the over 4,000 banks in operation, many of which are struggling in the current market.
Mergers help reduce banks' cost of capital and enable them to expand and diversify their deposit bases, which are crucial for funding. Morningstar reports that industry deposit costs have risen for eight consecutive quarters as savers chase higher yields, though these costs are now nearing their peak. Notable deals this year include SouthState's acquisition of Independent Bank Group, forming a bank with $65 billion in assets, and UMB Financial's takeover of Heartland Financial, creating a bank with $64.5 billion in assets.
As Treasury yields fall, banks that postponed deals to avoid locking in losses on high-yield securities are expected to consider mergers and acquisitions. Wells Fargo analyst Mike Mayo estimates that about 45% of the paper losses on banks' securities holdings have been recovered since their peak two years ago. David Portilla, a partner at Davis Polk & Wardwell, anticipates increased M&A activity as the interest rate environment stabilizes and balance sheets become more robust.
New York Community Bancorp, which faced significant challenges in commercial real estate earlier this year, tops the list of potential takeover targets among regional banks, according to Reuters' analysis. Other banks with a high likelihood of acquisition include Valley National, Hope Bancorp, Banc of California, Texas Capital Bancshares, and Fulton Financial, all trading below their book value.
Mid-sized banks like Fifth Third and Huntington Bancshares are seen as potential buyers of smaller rivals to better compete with major players like JPMorgan Chase, Bank of America, and Wells Fargo. Regulatory scrutiny is expected to intensify under new rules proposed by the FDIC and OCC, particularly for mergers resulting in banks with over $50 billion in assets.
Despite the regulatory challenges, David Portilla believes that the logic behind banking sector consolidation is recognized by regulators. Political factors, including the stance of the current administration and potential changes under a re-elected Donald Trump, could also influence the regulatory approach to bank mergers.
