July 13, 2024

Caught in the Crosshairs: Which Regional Banks Face the Risk of Takeovers?

Image Credits: Cooper Neill/Bloomberg/Getty Images

A trio of regional banks finds themselves under the watchful eye of larger rivals, poised as potential acquisition targets due to dwindling returns and profitability, a recent analysis by KBW suggests.

Christopher McGratty, a voice at KBW, points out a precarious position for banks with assets ranging between $80 billion and $120 billion. They’re wrestling with the lowest structural returns among banks with substantial assets, hinting at a dire need to expand or face prolonged struggles due to impending regulations.

McGratty’s radar targets Comerica, Zions, and First Horizon among this cohort, speculating that they might ultimately prey on more prosperous competitors. While Zions and First Horizon chose silence, Comerica has yet to respond.

However, not all hope seems lost. According to the analyst, Western Alliance, and Webster Financial, standing out with above-average returns, could retain independence but might also entertain the idea of selling themselves.

Surprisingly, the tides may turn for others in the group. Banks like East West Bank, Popular Bank, and New York Community Bank boast higher returns, positioning them as potential acquirers rather than targets in this evolving landscape.

McGratty emphasizes, “Not every bank is as profitable as others, and there are scale demands you have to keep in mind.”

Regulatory winds blowing after the collapse of mid-sized banks earlier in the year propose substantial changes. These shifts intend to subject banks with at least $100 billion in assets to measures similar to those for global banking giants, amplifying compliance and funding costs across the board.

Amid these changes, regional banks witness a rollercoaster ride in the market. Despite a 21% share drop this year, recent weeks show an uptick following subsiding inflation concerns. Nonetheless, the sector grapples with apprehensions surrounding new rules and the potential impact of a recession on loan losses, particularly in commercial real estate.

KBW’s analysis foresees a future where banks optimize profitability by clustering into three asset-based groups. Meanwhile, smaller institutions might need to scale up to at least $20 billion in assets to counterbalance the loss tied to debit card revenue.

The dilemma deepens for banks hovering around $80-$90 billion in assets, like Zions and Comerica. Market assumptions forecast their imminent transition into $100 billion-asset banks, which might compress their valuations, as McGratty elucidates.

Contrastingly, larger banks boasting robust returns like Huntington, Fifth Third, M&T, and Regions Financial stand primed to grow by absorbing smaller players.

Despite differing opinions, KBW’s earlier downgrade of the U.S. banking industry in 2022 preceded the regional banking crisis. Known for influencing banking industry indexes, KBW indicates that while banks await regulatory and interest rate clarities, consolidation remains an ongoing theme.

McGratty asserts, “There’s still too many banks, and they can be more successful if they build scale.”

As the banking landscape braces for an imminent shakeup, the chessboard is set, and the fate of these regional banks hangs in the balance, awaiting the next move in this strategic game of acquisitions and survival.

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