A Trio of Regional Banks Could Be Acquisition Targets

According to KBW analysts, banks with between $80 billion and $120 billion in assets could become targets for acquisition by larger rivals due to increasing pressure on returns and profitability. Christopher McGratty of KBW stated that this group has the lowest structural returns among banks with at least $10 billion in assets, putting them in a position of needing to grow larger to help pay for upcoming regulations or struggle for years.

Potential Acquisitions

McGratty indicated in a Nov. 19 research note that Comerica, Zions, and First Horizon, which have $80 billion to $120 billion in assets, might ultimately be acquired by more profitable competitors. However, Zions and First Horizon declined to comment, and Comerica had no immediate response.

On the other hand, McGratty also pointed out that banks such as Western Alliance and Webster Financial, which have earned high returns, could consider selling themselves even though they have the right to remain independent.

Market Changes and Regulations

Banking regulators have proposed a series of changes following the collapse of three midsized banks this year, which will affect institutions with at least $100 billion in assets. These changes will increase compliance and funding costs for banks.

Industry Outlook

The new rules will lead to banks clustering in three groups for optimized profitability: above $120 billion, $50 to $80 billion, and $20 to $50 billion in assets. Banks with $80 billion to $90 billion in assets may soon face the burdens of being $100 billion-asset banks, affecting their valuations. However, larger banks such as Huntington, Fifth Third, M&T, and Regions Financial are well-positioned to grow through acquiring smaller lenders.

Banking Industry Analysis

KBW analysts downgraded the U.S. banking industry in late 2022, months before the regional banking crisis, due to slowing revenue growth. The industry is waiting for clarity on regulations and interest rates before pursuing deals, but consolidation remains a consistent theme. McGratty has noted that there are still too many banks, and they can be more successful if they build scale.