US regional banks gear up for M&A bonanza

One of the most anticipated trends in US banking began this month not in Wall Street or San Francisco but in Salt Lake City, Utah.

On Wednesday, Zions Bancorp, a regional player with $66 billion in assets, saw its proposal to shed federal oversight approved by the Financial Stability Oversight Council (FSOC).

Ever since the US Senate passed a bill raising the key threshold for US banks to be considered to be systemically important financial institutions (Sifis) earlier this year, the market has been expecting a slew of players in the $50 billion to $100 billion size range to eagerly throw off all of the Fed’s enhanced prudential standards.

The new rules state that banks with assets within this range are no longer subject to Sifi rules with immediate effect.

This change was always expected to benefit the smaller banks first, because under the terms of the bill those larger banks with assets of between $100 billion and $250 billion will only be released from the standards 18 months after their smaller peers. They will also still be subject to periodic stress tests.

Regulatory easing

There could, however, be even more regulatory easing ahead: Randal Quarles, the Fed’s vice-chairman for bank supervision, has recently suggested that Sifi regulations should be eased for banks that have more than $250 billion in assets but are not global.

This is music to the ears of the US super-regionals: PNC, Capital One and US Bancorp.

Zions Bancorp was one of the smaller banks to be caught up in the Sifi rules, so it is not surprising that it has been ahead of the pack in breaking free. The trend that its move signals is not, however, just a change in regulatory oversight. It could be the starting gun for a wave of consolidation among the country’s regional players.

When Euromoney visited New York in June, there was one topic that came up in every FIG sector conversation that we had: how the raising of this Sifi threshold would herald a bonanza of M&A in a sector long overdue some consolidation.

The $50 billion Sifi threshold had discouraged banks from merging in case it tipped them over this line into more draconian oversight. So, the lifting of the threshold could herald a buying frenzy.

Banking is a scale game, so there is huge pressure for regional banks to get bigger. The value proposition of the local, community player is being eaten away by technological change and the rise of digital banking.

There are 5,000 regional banks in the US and 4,800 of them have assets of less than $1 billion. This is where consolidation is already happening and might now accelerate.

Regulatory change will not hurt, but any increase in merger activity could simply be because valuations are up, and it is now 10 years since the financial crisis 

According to S&P Global Market Intelligence, there had been 259 bank mergers among regional banks and thrifts in the US in the 12 months to June 15, 2018. The lion’s share had been in the mid-west (102) and the south-east (67). Just 27 of these deals had a transaction value greater than $100 million, while 18 were between $50 million and $100 million. Forty-one deals were valued at less than $50 million.

And it is smaller banks that are selling: 69 of these deals involved a seller with assets of less than $250 million. None of the deals in the past 12 months involved a seller with assets greater than $10 billion.

The logic for these deals is compelling. In a rising rate environment, regional banks want to onboard deposits and the easiest way to do this is to buy a smaller competitor. Prices for good community banks are edging up to two-times book from 1.6/1.7 times book and some in Texas and the mid-west are getting done at 2.5 or three-times book.

Expect a lot more of the same, but such targets won’t attract larger buyers because deals of this size simply don’t move the needle. So, any change to Sifi thresholds doesn’t really have any relevance here.

At the other end of the scale, there are signs that M&A is stirring too. Many larger regionals have been partnering with fintechs to get scale and there have been some bank mergers too.

In May, Fifth Third Bancorp ($142 billion in assets) agreed to buy Chicago-based MB Financial (assets of $20 billion) in a $4.7 billion deal, and BB&T ($221 billion in assets) has revealed that it is also looking for an acquisition in the $20 to $30 billion range. Interestingly, such a deal may push BB&T over the new, $250 billion threshold.

What about all those banks in the middle, though? Those that have been hovering around the $50 billion to $100 billion mark but will now be released from the threat of becoming a Sifi should they decide to merge.

This alone will drive M&A, according to many investment bankers, although it might be wise to lend a sceptical ear to such claims, coming as they do from the very M&A teams most eager to advise on such deals if and when they materialize.

Case study

The case study here is the CIT Group’s acquisition of OneWest Bank in 2015, which pushed it over the $50 billion line.

Then CIT chief executive and ex-Merrill Lynch head John Thain relished the elevation, declaring that it was “the first transaction that will create a Sifi”. The deal has, however, been problematic and CIT, which grew to nearly $70 billion after the merger, has now shed many of the assets that pushed it over the line in the first place.

Another deal, New York Community Bancorp’s proposed purchase of Astoria Financial in 2016 was pulled in a decision widely viewed to have been driven by the fact that the acquirer would have gone from assets of $49.5 billion to $64 billion.

It is hard to believe that Sifi thresholds are the only factor at play here.

Whether or not banks M&A will be driven by regulatory change or technological evolution has long been up for debate. Regulatory change will not hurt, but any increase in merger activity could simply be because valuations are up, and it is now 10 years since the financial crisis.

The Dow Jones mid-cap banks index was up 14% in the first quarter of this year and CEOs are under huge pressure from shareholders who have been patiently waiting for a return on these investments. Now could be that time.