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US banking market on the road to consolidation of its 5,600 banks

US banking market on the road to consolidation of its 5,600 banks

The US banking industry has largely sat out the M&A wave of recent years. While deal records have fallen in almost every other sector, big banks have done almost nothing, shrinking rather than expanding.

And merger activity among small and mid-sized banks — some 5,607 of them, at last count — has been subdued. But when Fifth Third Bancorp of Cincinnati revealed its $4.7bn swoop for Chicago’s MB Financial on Monday morning, shares in other Chicago-area banks began to move, too.

Wintrust, a similar-sized bank based in Rosemont, Illinois, ended the day up almost 4%, while First Midwest of Itasca closed up 3%. The implications were obvious: after years of thin activity in bank M&A, this deal could mark a turn.

The conditions for dealmaking look better than at any time since the financial crisis. Higher interest rates and lower taxes have pumped up bank profits, giving management teams stronger platforms from which to contemplate doing something radical. Data released on Tuesday by the Federal Deposit Insurance Corporation showed that net income across the banking industry rose 27% from a year earlier in the first quarter, to a record $56bn.

Shareholder activists have also begun to flex their muscles, calling for fresh ways to boost returns at Ally Financial, Comerica, Citigroup, Morgan Stanley and Regions Financial, among others.  And then — most importantly — there is the shifting regulatory landscape.

US banking industry

US banking market on the road to consolidation of its 5,600 banks

For much of the post-crisis period, agencies generally frowned on any transaction that might make a bank bigger, more complex and tougher to police. Several proposed combinations were abandoned because regulators took too long to approve them, among them New York Community Bancorp’s bid for Astoria Financial and Investors Bancorp’s move on The Bank of Princeton.

A $5.3bn tie-up between M&T Bank of New York and Hudson City Bancorp of New Jersey took more than three years to limp over the finish line. Now, under the administration of Donald Trump, there are clear signs that attitude is changing. Last year, the Federal Reserve made it easier for banks to merge by lifting the combined size threshold that would trigger a much deeper regulatory probe, from $25bn in assets to $100bn.

On top of that, the Fed is considering a change to the way it grades banks’ management teams, moving from a five-point to a four-point scale. In practice, said Rodgin Cohen, senior chairman at Sullivan & Cromwell, that may mean many managers will be bumped up from a grade 3 (“less than satisfactory”) to a grade 2 (“satisfactory”).

In the past, a three-rating has been an effective bar on doing deals, keeping many would-be acquirers on the sidelines.  Another spur to consolidation comes with the new bank-relief bill passed by Congress, which is set to free small and mid-sized lenders from many of the restraints that apply to the trillion-dollar banks such as JPMorgan Chase and Bank of America.

The post US banking market on the road to consolidation of its 5,600 banks appeared first on Payments Cards & Mobile.

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