Speaking to CNBC earlier this morning, Bove said that 2016 could turn out to be one of the biggest years on record for bank mergers this past decade. Bove is not the only one predicting record earnings. Last year, Mark W.Olsonm chairman of Treliant Risk Advisors, predicted “an excess of 400 unassisted bank mergers in 2016.” Richard J. Parsons, a former executive at Bank of America, also made a similar prediction earlier this week. According to Parsons, the number of bank charters “would shrink by 6% on an annualized basis” in at least one quarter or quite possibly the entire year.
The predictions come in a week full of earnings from major banks such as Wells Fargo & Co. (WFC) and Citigroup Inc. (C). JP Morgan Chase & Co. (JPM) reported earnings of $1.32 per share and revenues of $23.7 billion for the fourth quarter earlier this morning. It beat analyst estimates of $1.25 per share. Despite the profits, a combination of low oil prices (which have decreased the value of their holdings in the commodity) and low interest rates have forced banks to search for growth avenues. Their trading activities are also hemmed in due to increased government regulation.
A Small Bank Merger Boom
In an uncertain global economy, bank mergers seem like a viable option to ensure growth. The number of bank mergers has increased sequentially over the years, increasing almost 20 percent to 250 mergers between 2013 and 2015, according to FIG partners, a research firm specializing in community banks.
But, investors looking for big ticket names scooping up smaller banks might be in for a surprise. According to Bove, most of the action will be limited to regional banks buying each other. In an investment note, Fig partners echoed Bove's statement. “In 2016, we expect M&A deals to increase but sellers size is unlikely to change much at all,” the firm wrote in a report. “Small bank consolidation is the real trend – frankly, it always has been.” The Federal Reserve cleared the decks for small bank mergers by raising the amount of debt that such banks can take on to finance mergers. Several small banks, such as BankFinancial (BFIN) and Banc of California (BANC) are considered attractive targets for acquisitions.
The Bottom Line
A low interest rate environment and government regulations has forced banks to look to other options for survival and growth. Mergers and acquisitions seems to be the most attractive one. 2016 is expected to be a record year for M&A in the banking industry. But, most such activity will be limited to small community banks, which are fighting for their survival in a low interest rate environment.