Banks Will Seek Mergers to Combat Cost Pressure

(Bloomberg) -- U.S. banks with $50 billion of assets or less will probably pursue more mergers in the next 18 months to contend with higher regulatory costs and competition for loans, Fitch Ratings said.

Bank managements may also seek combinations to help mitigate the risks posed by rising interest rates, Fitch said today in a report.

“There are too many banks chasing too few lending opportunities,” Justin Fuller, a Fitch analyst, said in a phone interview. The biggest banks “can underprice the smaller guys, just because of their scale and funding advantage, and so the smaller banks are just really getting squeezed.”

Fuller said he anticipates banks with assets of $5 billion to $15 billion to seek mergers, while lenders with around $50 billion of assets will seek to get closer to $100 billion.

Rising stock prices will also drive bank managements to sell to competitors or make acquisitions, according to Fitch. The 46-company Standard & Poor’s SmallCap Banks Index is up 25 percent so far this year.

“For a while they’ve thought their bank is worth more than what the market’s pricing it,” Fuller said, explaining why bank executives have been reluctant to sell.

Mergers and acquisitions among U.S. banks have been delayed by an uncertain regulatory environment that has raised costs, according to the report. M&T Bank Corp.’s purchase of Hudson City Bancorp, announced in August, has been postponed by a Federal Reserve review of its compliance with anti-money laundering requirements.

Now “there’s greater certainty, and so you can manage that better through an acquisition and integration process,” Fuller said.

Banks in growing markets and whose assets performed well during the financial crisis will probably be most attractive to acquirers, according to Fitch. Potential buyers are likely to have strong earnings and regulatory processes, Fitch said in the report.

Manager and board fatigue may also be a factor, according to Fitch.

“You’d expect them to either just be tired of running the bank because it’s not like it used to be, or to look for opportunities to get bigger so that they can maybe better compete in terms of taking out some costs and benefiting from scale, trying to reduce their funding costs,” Fuller said.