Possible long-term M&A catalysts are beginning to emerge in the U.S. banking sector, suggests Fitch Ratings in a new report.
The rating agency says that a variety of factors could prompt an increase in merger and acquisition activity in the intermediate term, such as higher market valuations for healthy institutions, a strategic focus on growing loans, a need to mitigate potential interest rate risk, a demand for sufficient scale to help manage higher regulatory and compliance costs, and fatigue among the managements and boards of potential sellers.
It notes that, to this point, consolidation activity has been delayed for several reasons, including a shifting and growing regulatory focus, and rising compliance costs, that have held up the consummation of deals. So, while M&A activity is likely to remain muted in the short term, Fitch says that increasing cost structures, growing economies of scale that benefit larger institutions, a desire for growth, and intense competition for new loans “have spawned an environment that will promote increased banking M&A.”
Fitch says that banks with high cost structures, elevated efficiency ratios, and lower capital ratios, are likely targets for consolidation. Also, banks with operations in growing markets, a presence in asset classes that performed well through the credit crisis, and relatively lower stock market valuations as measured by price-to-tangible book value are also considered more likely to be acquired, it adds.
The buyers are likely to be efficiently run banks with strong earnings performance, institutions with sound regulatory processes and procedures, and those with high stock market valuation, it notes.