U.S. bank mergers on hold for now: Fitch

By James Langton | July 18, 2023 | Last updated on July 18, 2023
2 min read

The prospects for merger activity in the U.S. banking sector are dim, at least in the short term, amid regulatory uncertainty and valuation challenges, according to Fitch Ratings.

In a new report, the rating agency said M&A involving U.S. banks has stalled and may not revive until the prevailing headwinds to deal making ease.

“U.S. bank M&A deals will be constrained until regulatory scrutiny lessens and authorities provide a more definitive framework and approval process for combinations,” Fitch said, adding that “policy-makers have sent mixed messages” about their attitude toward bank M&A.

“Regulators are increasingly weighing financial system stability concerns and the merits of competition against ‘too-big-to-fail’ concentration risk given the fallout of bank failures earlier this year,” it said.

In particular, Fitch noted that the U.S. Department of Justice has indicated it would “take a more granular, wide-ranging approach to bank merger reviews amid increased antitrust scrutiny, which could further extend the review process.”

At the same time, the Senate Banking Committee has been “highly critical” of further consolidation, it said, suggesting that legislation requiring greater deal scrutiny could be reintroduced.

“Delays in closings due to the prolonged regulatory approval process have also increased execution risk, keeping potential buyers and sellers on the sidelines,” Fitch said.

Banks’ depressed asset and equity valuations are also weighing on potential M&A activity, the report said.

While the S&P 500 index is up by about 18% this year, the bank sub-sector is down 18%, it noted.

“Depressed valuations for publicly traded banks have been further exacerbated by requirements of buyers to mark to market all acquired loans and securities, which could further hamper deal economics over the near term,” Fitch said.

Interest rate–sensitive assets, such as commercial real estate, are also under valuation pressure, it added.

“Bank earnings will face headwinds from still high but moderating inflation and uncertainty around further interest rates moves amid lower growth,” it said.

Ultimately, though, the consolidation trend in the U.S. banking sector will resume, Fitch said, “particularly for smaller banks with under US$100 billion in assets that can benefit from improved efficiencies and economies of scale amid rising funding, credit and technology costs.”

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James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.