Regional banks, which were at the center of the US banking crisis last year, are making more deals to support their balance sheets and compete with rivals. This has led to a wave of consolidation in the banking industry, but could also attract antitrust scrutiny.

According to Dealogic, banks with assets between $10 billion and $100 billion have completed 38 deals this year, higher than the 29 deals in the same period last year. In addition, according to media analysis of StarMine M&A data provided by LSEG, more than two-thirds of banks in the KBW regional banking index have a greater than 50% chance of being acquired in the next 12 months.

Market participants said that regional banks face tremendous pressure to expand their scale and achieve diversification due to the rise in interest rates, which suppress lending, intensify competition for deposits, and result in greater losses in commercial real estate loans. Macrae Sykes, portfolio manager of the banking investment group at Gabelli Funds, said: "Regional banks need to integrate to compete more effectively. There are more than 4,000 personal banks in the United States, many of which are not competitive in today's environment."

Mergers can lower bank funding costs and allow acquirers to expand and diversify their deposits -- a key source of funding. This is according to Morningstar who said this month that banking deposit costs have risen in the past eight quarters as savers seek higher-yielding products, despite deposit costs currently appearing to have peaked.

$SouthState (SSB.US)$acquired smaller competitors$Independent Bank Group (IBTX.US)$This merger will create a $65 billion bank, the biggest deal in terms of assets this year. $UMB Financial (UMBF.US)$Following its acquisition of Heartland Financial, this deal will create a bank with assets of $64.5 billion. UMB CEO Mariner Kemper said in April that Heartland's low-cost deposit base was attractive to the bank, and the deal would enable it to expand into new states and reach more depositors.

As US Treasury yields decline, banks that have delayed trading to avoid losses on securities they hold when yields were higher are expected to explore mergers. Mike Mayo, an analyst at Wells Fargo & Co, wrote in a report this month that book losses on securities accumulated by banks have fallen by about 45% since their peak two years ago. David Portilla, a partner at Davis Polk & Wardwell, a law firm that provides consulting services for financial mergers and acquisitions, said: "As interest rates and the broader macro environment evolve, balance sheets will be better able to support acquisition activity, which may lead to more dealmaking."

$New York Community Bancorp (NYCB.US)$ is the most likely target among US regional banks. The bank's fourth-quarter 2023 performance and significantly higher-than-expected credit allowances triggered massive selling of the stock earlier this year. LSEG data shows that New York Community Bancorp has a price-to-book ratio of about 0.48, which is lower than 1, which usually indicates an undervalued stock.

Following New York Community Bancorp, other banks seen as potential acquisition targets include: $Valley National Bancorp (VLY.US)$N/A.$Hope Bancorp (HOPE.US)$,$Banc of California (BANC.US)$,$Texas Capital Bancshares Inc Pref 09/21/2042 (TCBIL.US)$And.$Fulton Financial (FULT.US)$Their asset size ranges from $17 billion to $62 billion, and their price-to-book ratios are all below 1.

Mid-sized banks such as Fifth Third and $Huntington Bancshares (HBAN.US)$may be interested in acquiring smaller rivals to better compete with JPMorgan Chase, Bank of America and Wells Fargo & Co.

Strict regulation.

Although mergers and acquisitions help support struggling small banks, larger transactions will face more scrutiny under new rules proposed by the US Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC). How regulatory scrutiny of transactions by bank regulators will affect competition, systemic risk, and community needs will be examined. In some cases, the Department of Justice will provide guidance on antitrust issues.

Both the OCC and FDIC have proposed stricter merger policies this year, particularly for transactions with assets over $50 billion, to ensure that the best mergers are approved and do not increase systemic risk. The Biden administration, which takes a tough stance on comprehensive mergers, urged the Federal Reserve and the Department of Justice to update bank merger guidelines in 2021 and strengthen supervision of transactions.

However, David Portilla said that regulators were aware of the pressures faced by the banking industry. He said, "The industry logic for bank consolidation is very strong. I think regulators have recognized that."

In addition, if Republican presidential candidate Trump wins again in the November election, scrutiny of bank mergers and acquisitions may be relaxed. Jason Benowitz, Senior Investment Portfolio Manager at investment firm Segall Bryant & Hamill, said, "I expect regulatory enforcement to weaken."

Editor/Lambor