Zions, Comerica, First Horizon: Regional bank takeover risk
by aparodyoflife ·
- Comerica, Zions and First Horizon may eventually be acquired by more profitable competitors, according to KBW.
- Big banks with strong returns, including Huntington, Fifth Third, M&T and Regis Financial, are positioned to grow by acquiring smaller lenders.
- Two other lenders, Western Alliance and Webster Financial, may also consider selling themselves, analysts at KBW said.
A customer enters the headquarters of Comerica Bank Inc. In Dallas, Texas.
Cooper Neil | Bloomberg | Getty Images
Three regional banks are facing increasing pressure on revenues and profitability, making them potential takeover targets by a larger rival, according to KBW analysts.
Banks with assets between $80 billion and $120 billion are in a tough spot, says KBW’s Christopher McGroty. That’s because this group has the lowest structural returns among banks with at least $10 billion in assets, putting them in the position of needing to grow even bigger to help pay for the costs of coming regulations — or struggle for years.
Of the eight banks in that region, Comerica, Zions and First Horizons may eventually be acquired by more profitable rivals, McGroty said in a Nov. 19 research note.
Zion declined to comment. Comerica and First Horizon did not immediately have a response to this article.
While two other companies in the group, Western Alliance and Webster Financial, have “earned the right to remain independent” with higher returns than their peers, they could also consider selling themselves, the analyst said.
The remaining lenders, including East West Bank, People’s Bank and Community Bank of New York, each have higher returns and could end up as acquirers rather than targets. KBW estimated banks’ long-term returns including the impact of upcoming regulations.
“Our analysis leads us to these conclusions,” McGroty said in an interview last week. “Not every bank is as profitable as others, and there are significant requirements to keep in mind.”
Banking regulators have proposed a sweeping set of changes after rising interest rates and an outflow of deposits led to the collapse of three medium-sized banks this year. These moves take broad measures that apply to the largest global banks right down to institutions with at least $100 billion in assets, increasing compliance and financing costs.
Invesco KBW Regional Bank ETF
While regional bank stocks are down 21% this year, according to the KBW Regional Banking Index, they have risen in recent weeks as concerns about inflation ease. The sector remains burdened by concerns about the impact of new rules and recession risks on loan losses, especially in commercial real estate.
Given the new rules, banks will eventually group into three groups to improve their profitability, according to the KBW analysis: more than $120 billion in assets, $50 billion to $80 billion in assets, and $20 to $50 billion in assets. Banks with less than $10 billion in assets have benefits tied to debit card revenue, meaning smaller institutions must grow to at least $20 billion in assets to recoup their losses.
The problem for $80 billion to $90 billion banks like Zions and Comerica is that the market assumes they will soon face the burden of being $100 billion banks, compressing their valuations, McGroty said.
On the other hand, larger banks with strong returns, including Huntington, Fifth Third, M&T and Regions Financial, are positioned to grow by acquiring smaller lenders, McGroty said.
Banks are waiting for clarity on regulations and interest rates before they pursue deals, but consolidation has been a consistent theme for the industry, McGroaty said.
“We’ve seen it throughout banking history; when there are lines in the sand around certain asset sizes, banks figure out the rules,” he said. “There are still too many banks out there and they can be more successful if they build scale.”
(Tags for translation) Business