Merger puzzle pieces

Rising regulatory scrutiny is likely to pose a growing obstacle to merger-and-acquisition activity in the U.S. banking sector, says Fitch Ratings.

Consolidation in the sector is expected to face headwinds from tougher oversight, particularly for banks with more than US$50 billion in assets, it said.

“As outlined in recent U.S. bank regulatory proposals, increasingly muscular supervisory scrutiny would weigh on prospective merger activity and increase hurdles for approvals,” Fitch noted.

In December 2023, the U.S. Department of Justice issued new merger guidelines that call for stricter antitrust enforcement, and expanded approaches to measuring competition.

Since then, various banking regulators have proposed rule changes that aim to increase scrutiny of proposed deals, particularly deals involving larger banks.

Political opposition to bank mergers has increased too, Fitch noted.

For instance, the proposed acquisition of Discover by Capital One has faced significant political criticism, with opponents to the deal “citing potential negative effects on consumers and the systemic risk of transaction,” it said.

The rising regulatory obstacles increase execution risk and the economics of possible deals, which is likely to keep potential dealmakers on the sidelines, the report said.

“We expect bank M&A deals to remain muted until asset valuations stabilize and bank valuations continue to recover,” Fitch concluded.

“However, eventually consolidation will resume, with a growing backlog of deal flow given the lack of mergers, especially for smaller banks that can benefit most from increased scale and improved efficiencies amid rising funding, credit, compliance and technology costs,” it said.