A large wave of M&A’s in the U.S. financial sector may be underway, signaled most recently by Fifth Third Bancorp’s (FITB) announcement earlier this week to purchase MB Financial Inc. (MBFI). The rolling back of post-financial crisis regulation as well as the fact that the U.S. banking sector is still among one of the most fragmented in the developed world are factors that could lead to even more such deals. As big banks like Bank of America Corp. (BAC) and JPMorgan Chase & Co. (JPM) compete in a “zero sum game” for market share, smaller banks like Wintrust Finacial Corp. (WTFC) and TCF Financial Corp. (TCF) are likely targets, according to Barron’s.
As of the close of trading on Thursday, Wintrust is up 14.4% year to date (YTD), while TCF is up 26.9% on the year. JMP Securities’ Christopher York believes that both these banks fit into the small- and mid-size bank category that share similar characteristics with MB Financial, making them attractive next takeover targets. (To read more, see: 2018 Could Be Year of the Financial Stock with M&A Prospects.)
M&A activity has been common for non-financial firms in the post-crisis decade as a way to boost earnings amid sluggish economic growth, but the banking sector has largely been quiet on that front. At least until Fifth Third’s announced deal, which was valued at $4.7 billion and York notes that it is the largest such deal since 2015, according to Barron’s.
Sizing the M&A Wave
The financial sector is looking primed for a wave of M&A’s, especially the small- and mid-cap banks that would benefit from laxer regulations if the “too-big-to-fail” threshold were to be raised from the current level of $50 billion in assets to $250 billion. The raising of that threshold would give banks currently sitting around the $50 billion level in assets fresh incentives to continue growing without worrying about the hassle of complying with more regulation due to their increasing size.
The coming wave of consolidation in the banking sector, however, is not solely dependent on regulation—it also has much to do with the fragmented nature of the industry within the U.S., according to Credit Suisse analyst Susan Roth Katzke. Only half of U.S. banking assets are owned by the country’s four largest banks, whereas in other nations, the four largest banks own at least 80% of the economy’s banking assets. Such fragmentation provides plenty of opportunities for new acquisitions, and Katzke insists that large banks like Bank of America and JPMorgan with good brands and the cash to spend on new technology will have the competitive advantage here.