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Interest Rates and other conditions are setting the stage for more bank acquisitions this year.

By Calvin Trice and Jeff Sheban

Bank deals should return to a steady volume this year with investor confidence in bank stocks restored and rising interest rates giving large buyers greater incentive to snap up assets, deal advisors told Mergermarket.

Inviting targets include smaller banks that cannot reach the scale needed for satisfactory shareholder returns, as well as some of the largest U.S. regional banks, particularly those in Sunbelt markets with rising populations, they said.

The Federal Reserve’s plan to cool inflation with higher interest rates will strengthen bank balance sheets further, placing buyers in an even better position to grow through acquisitions.

Bank stock growth stokes demand

Stocks in the banking sector entered 2022 as one of the strongest in the equity markets. With the stocks of larger banks trading at two times tangible book value, a smaller one whose stock is trading at 1.8-times book will make an attractive target, said R. Lee Burrows, vice chairman for investment banking at Performance Trust Capital Partners. (The price to tangible book value is how much a bank’s stock is trading for relative to the value of its tangible assets including deposits, loans and branches.)

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“The mid-tier banks between $10 billion and $100 billion in assets, for the most part, have very strong currencies, [and] very strong stock prices,” Burrows said. “They’re going to be inclined to use that currency to make acquisitions that can be financially attractive.”

With the promise of interest rates moving up meaningfully for the first time in years comes the potential for wider profit margins, which should push share prices higher and with it the likelihood to buy, he said. Tempering the outlook for deal activity has been the chill from the Biden Administration and some members of Congress making the case that the federal government should block mergers among the largest banks, said Eric Corrigan, senior managing director for Commerce Street Capital.

“For most deals, it’s not going to be an issue, but if someone tried to do something really big, I don’t know that it will [be approved],” he said.

Sunbelt ripe for M&A

The heightened deal activity will come with regional biases. Texas is poised for a robust period of M&A, said Kamal Mustafa, chairman and founder of Invictus Group. The state’s economy is vibrant and includes a number of banks near the thresholds of $1 billion and $5 billion in assets, where factors including economies of scale, regulatory costs and deal profile encourage a sale in the absence of sustained growth, Mustafa said. “If they don’t see themselves getting there, it’s time to cash out,” he said.

Florida and Georgia should see more deal activity because consolidation in the Sunshine State has matured to the point where a few large regional banks have begun to encroach on one another. Many have found fertile acquisition ground to the north in Georgia, Mustafa said.

Other types of acquisitions are cooling, Mustafa noted. In Midwest agricultural lending, for example, many local farming operations have been consolidated by large corporates who bank with the big nationals. On the West Coast, the smallest banks have all but disappeared, and the remaining banking centers have too much distance and geography separating them to justify much M&A activity, he said.

Demand from north of the border

Sellers could once count on bids from foreign buyers to push up deal multiples, but Asian and European banks have mostly exited the U.S. market because the domestic regulatory environment has depressed returns, Commerce Street’s Corrigan said. Only Canadian buyers remain.

Two Canadian banks, Toronto-Dominion Bank and Royal Bank of Canada, each have assets in excess of $1 trillion and are larger than all but four U.S. banks. Three others – Scotiabank, Bank of Montreal and Canadian Imperial Bank of Commerce – rank among the dozen largest banks in North America with assets ranging from $660 billion to nearly $1 trillion.

In December, BMO said it was buying San Francisco-based Bank of the West from BNP Paribas for $16.3 billion, while in February, TD said it was acquiring Memphis-based First Horizon for $13.4 billion, a move that will make it the sixth-largest bank in the U.S. by assets. Bank of the West has assets of $105 billion to First Horizon’s $89 billion.

The CEO of a publicly listed U.S. bank told Mergermarket that he would not be surprised to see other U.S. regionals fall to the largest Canadian banks, naming Birmingham, Alabama-based Regions Financial, with assets of $163 billion; Dallas-based Comerica, with assets of $95 billion; and Columbus, Georgia-based Synovus, with assets of $57 billion, as potential targets. “People love the South and Texas, and these are the banks that would be on someone’s radar screen,” the CEO said.

Another possibility with more exposure to the Midwest and the industrial economy would be Columbus, Ohio-based Huntington Bancshares, with assets of USD 174bn, the CEO said, adding that larger regionals are more attractive to the Canadians than several smaller targets because “it’s too much trouble to string together a bunch of small deals.”

Calvin Trice covers financial services for Mergermarket and can be reached at [email protected], and Jeff Sheban is a Mergermarket writer and editor and can be reached at [email protected].

Source: Forbes

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