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Why the recent wave of regional bank mergers is far from over – and you could benefit from it

By on September 4, 2021 0

Faced with competition from mega-banks and fintech players, regional banks and midsize lenders are finding themselves in the mood to mingle in 2021.

S&P Global Market Intelligence is now forecasting $ 63.3 billion in bank mergers in 2021, up from $ 27.8 billion in 2020 and $ 55 billion in 2019, according to figures released Thursday. The figure of $ 63.3 billion represents the highest total since the global financial crisis. In 2022, S&P expects at least $ 60 billion in M&A banking activity.

If you’re lucky enough to own individual shares of a bank that is being bought, you are likely to get a rise in the share price, as buyers typically offer a higher price to shareholders of a target company.

But even some exposure to regional banks and financial stocks has paid off for investors this year. The SPDR XLF Financial Select ETF,
-0.63%
is up 30% year-to-date against a 20.8% rise in the S&P 500, as of Thursday’s close. The SPDR S&P Regional Banks ETF has also outperformed the S&P 500 with a 25.6% gain so far in 2021.

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On the broader M&A side, you’ll likely see more CFG-style deals from Citizens Financial Group,
-0.97%‘s
$ 3.5 billion purchase of Investors Bancorp ISBC,
-0.28%
as announced in July and Huntington Bancshares HBAN,
-0.72%Inc.
Acquisition of $ 22 billion in shares of Detroit-based TCF Financial Corp., said Gregory Lyons, corporate partner and co-chair of the financial institutions group at Debevoise & Plimpton.

“It was accelerated by the pandemic and the desire to have a bank branch in your pocket on an iPhone,” Lyons told MarketWatch. “A lot of clients haven’t walked into a bank branch for years. Regional banks are in many cases looking for economies of scale to invest in technology.

While larger transactions between publicly traded banks continue to drive mergers and acquisitions, smaller players are also involved in some 5,000 US banks, including smaller community banks.

“There are tons of mergers and acquisitions that are under the radar,” Lyons said.

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Examples of buyers in this corner of the market include Investar Holding Corp ISTR,
-0.22%,
which is expected to return to acquisition mode after gobbling up Alabama-based lender Cheaha Financial Group Inc. earlier this year, according to analysts at Hovde Group.

Seacoast Banking Corp. SBCF,
-0.50%
of Florida stands out as another serial acquirer as it pursues its strategy of buying small banks in the fastest growing Florida markets, Hovde Group

Fintechs on the payments side of players like Venmo, Stripe, Square, and PayPal are less regulated and they are taking banks out of business. Non-bank lenders such as Rocket Mortgage are also hijacking the mortgage market.

“I would be surprised if there aren’t next year or at least two or three major transactions in the regional banking space, including US banking subsidiaries of foreign banks in Canada, Japan and Europe.” , Lyons said.

However, the mergers between mega-banks such as JP Morgan Chase JPM,
-0.60%,
Citigroup Inc. C,
-0.46%,
and Bank of America Corp. BAC,
+ 0.07%
remain unlikely given obstacles related to antitrust agreements and central bank guidelines.

Even outside of antitrust rules, it would be difficult for a large bank merger to take place between global systemically important banks (GSIBs). The US Federal Reserve would demand an economic risk analysis, as outlined in Dodd Frank – a tough hurdle, said Ted Hassi, a partner at Debevoise focusing on antitrust issues.

However, larger regional bank reconciliations remain in the picture.

“I wouldn’t tell a big bank that you can’t make a deal,” Hassi said. “It should be approached with caution. Any major merger will spark some skepticism, and much of the blocking and struggling will be needed to get the deals done. “

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Such talk highlights potential deals on S&P components such as Fifth Third Bancorp FITB,
-0.47%,
US Bancorp USB,
-0.51%,
M&T Bank MTB,
-0.23%,
RF financial regions,
-1.65%,
PNC PNC Financial Services Group,
-0.10%,
KeyCorp KEY,
-0.35%,
Zions Bancorp ZION,
-0.05%,
First Republic Bank FRC,
+ 0.19%
and SVB Financial Group SIVB,
+ 0.32%.

SOURCE: S&P


“Banks are feeling increased pressure to merge due to the difficult income environment and dramatic changes in customer behavior during the pandemic,” Nathan Stovall, senior analyst at S&P, said in a statement. “More banks could go into selling because they see some of their strong peers decide to partner with other institutions.

S&P Global Market Intelligence expects 229 deals to take place in 2021, with 135 M&A deals in the second half of 2021 and 70 deals in the fourth quarter alone. Regional banks will continue to represent a greater proportion of sellers compared to previous years.