Analysis: US regional bank deals rise as lenders aim to bolster balance sheets

First Republic Bank

19/08/2024 11:00

By Manya Saini and Niket  Nishant
       Aug 19 (Reuters) - 
    Regional lenders at the heart of 
    last year's banking 
    crisis are cutting more deals to shore up their balance
sheets and compete with rivals, extending a wave of
consolidation in the sector that may attract anti-trust
scrutiny. 
  
        The banks, generally with assets between $10 billion and
$100 billion, have struck 38 deals so far this year, compared
with 29 during the same period last year, according to Dealogic
data.
  
        More than two-thirds of lenders in the KBW Regional
Banking Index  .KRX  have a greater than 50% chance of being
acquired over the next 12 months, according to a Reuters
analysis of StarMine M&A data provided by LSEG. The model
assigns target scores based on fundamentals, share price
valuations and other factors. 
  
        The regional banking sector has come under immense
pressure as elevated interest rates have dampened borrowing,
increased competition for deposits and led to larger losses on 
    commercial real estate loans
    , forcing banks to scale up and diversify, investors said.
  
    "The regionals need to consolidate to compete more
effectively," said Macrae Sykes, banking portfolio manager at
Gabelli Funds. "There are over 4,000 individual banks, many of
which are not competitive in today's landscape."
    Tie-ups lower banks' cost of capital and allow acquirers to
grow and diversify deposits, a key source of funding. Industry
deposit costs have grown each of the last eight quarters as
savers have sought out higher-yielding products, although costs
now look to be peaking, Morningstar said this month. 
    SouthState's  SSB.N  acquisition of smaller rival
Independent Bank Group  IBTX.O  which will create a lender with
$65 billion in assets is the biggest deal by assets this year.
UMB Financial's  UMBF.O  takeover of Heartland Financial
 HTLF.O  is close behind, creating a bank with $64.5 billion in
assets. 
    UMB CEO Mariner Kemper said in April that Heartland's
low-cost deposit base was attractive to the bank and that such
deals would allow lenders to expand into new states and access
more depositors.
    With Treasury yields declining, banks that had delayed deals
to avoid crystallizing losses on their securities holdings when
yields were high are also expected to explore M&A. 
    Around 45% of paper losses banks had amassed on their
securities holdings have been erased from their peak two years
ago, Wells Fargo analyst Mike Mayo wrote in a report this month.
    "As the interest rate and broader macro environment evolve,
balance sheets will be able to more readily support M&A, which
may lead to more activity," said David Portilla, partner at law
firm Davis Polk & Wardwell who advises on financial services
M&A.
    New York Community Bancorp  NYCB.N , whose CRE troubles
triggered a sector-wide selloff earlier this year, is the top
takeover target among regional banks, according to Reuters'
Starmine data analysis, which assigned NYCB a score of 98.
    The bank trades at a price-to-book ratio of about 0.48,
according to LSEG data. A ratio below one typically indicates an
undervalued stock. 
   NYCB was followed by Valley National  VLY.O , Hope Bancorp
 HOPE.O , Banc of California  BANC.N , Texas Capital Bancshares
 TCBI.O  and Fulton Financial  FULT.O , whose assets range from
$17 billion to $62 billion and all trade at a price-to-book
ratio of less than one.
        "If there is going to be stress and possible attractive
valuations, it is going to be down the food chain in terms of
the size of the banks," said Brian Mulberry, portfolio manager
at Zacks Investment Management which holds several bank stocks.
    Mulberry said that mid-sized lenders like Fifth Third
 FITB.O  and Huntington Bancshares  HBAN.O  might have an
appetite to snap up smaller rivals that would allow them to
better compete with the likes of JPMorgan Chase  JPM.N , Bank of
America  BAC.N  and Wells Fargo  WFC.N .
    The banks cited above either declined or did not respond to
requests for comment.
    
    
    REGULATORY HEADWINDS
    While tie-ups should help shore up faltering smaller
lenders, big deals are set to receive more scrutiny under new
rules proposed by the Federal Deposit Insurance Corporation
(FDIC) and the Office of the Comptroller of the Currency (OCC).
    Bank regulators review how deals will affect competition,
systemic risk, and the needs of affected communities, while in
some cases the Justice Department advises on antitrust issues.  
    Both the OCC and FDIC this year proposed tougher merger
policies, especially for deals that create banks with more than
$50 billion in assets, to ensure the best mergers are approved
and do not increase systemic risks. 
    In 2021, the Biden administration, which has taken a tough
stance on mergers across the board, urged the Federal Reserve
and Justice Department to update their bank M&A guidelines and
increase deal oversight.
    Bank deals have also drawn intense political scrutiny after
regulators last year arranged the sale of failed First Republic
Bank to JPMorgan and the sale of collapsed Signature Bank assets
to NYCB. That merger pushed NYCB into a new regulatory category,
contributing to its troubles. 
    Still, Portilla, who also advises on regulatory issues, said
the agencies were cognizant of banks' commercial pressures. 
    "The industry logic for banking sector consolidation is very
strong and I think that is recognized by the regulators,” he
said. 
    If Republican presidential candidate Donald Trump is
re-elected in November, bank M&A scrutiny is also likely to
ease. "I would anticipate a lighter regulatory touch," said
Jason Benowitz, senior portfolio manager at investment firm
Segall Bryant & Hamill.
    Spokespeople for Trump's campaign did not respond to
requests for comment. 

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Banks' valuations under pressure as investor concerns weigh    https://reut.rs/4cmHEBy
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 (Reporting by Manya Saini and Niket Nishant in Bengaluru and
Saeed Azhar in New York; Editing by Michelle Price and Anil
D'Silva)
 ((Manya.Saini@thomsonreuters.com; X: @manya__saini;))