mergers and acquisitions

The biggest bank merger since the financial crisis highlights the prospects for increasing consolidation in the U.S. banking industry, says Toronto-based fund manager Hamilton Capital Partners.

On Feb. 7, a pair of big U.S. regional banks, BB&T and SunTrust, announced a US$66 billion merger, which would create the sixth largest bank in the U.S. According to Hamilton Capital, an investment firm that specializes in global financials, the deal highlights the potential for consolidation in the sector to pick up speed.

“We believe the BBT/STI merger is significant as it signals U.S. bank M&A activity is likely to accelerate in the coming years, and the nature of M&A is likely to be different, at least in the next few years,” it says in a research note.

The firm says that the size of this deal is notable, as it indicates that U.S. regulators are open to greater consolidation. Yet, it doesn’t foresee a rash of deals among similarly-sized banks, largely because there aren’t many large regional U.S. banks left. Instead, it points to the hundreds of smaller banks that remain potential consolidation targets.

“While there might only be 14 regional banks, there are over 350 small and mid-cap banks, including over 150 mid-cap banks. With a still fragmented U.S. banking sector and larger banks consolidating we believe M&A in this category provides a greater investment opportunity,” it says.

Moreover, Hamilton Capital says that the positive market reaction to this transaction indicates that the market clearly favours deals that represent mergers of equals, or transactions that involve low premiums, “… believing they offer accretions/synergies with lower deal/execution risk.”

The firm notes that U.S. bank consolidation has been a secular phenomenon over the past 40 years, but that deal activity has been low since the financial crisis. Now, the firm is expecting “consolidation to continue for at least another 10 years.”