It has been awhile since the banking sector saw a legitimate wave of consolidation. In a sign that that could be changing, Fifth Third Bancorp (FITB) said Monday it will acquire rival MB Financial (MBFI) for $4.7 billion. That was the largest deal in the banking sector in three years.
That is not a monster deal, but it could signal that some banks are looking for bolt on deals with mid- and small-cap rivals. The SPDR S&P Regional Banking ETF (NYSEArca: KRE), the largest regional bank exchange traded fund, could be positioned to take advantage of increased industry consolidation. KRE holds 120 stocks with a weighted average market capitalization of $9.53 billion.
“It’s not hard to see why banks might decide now is a good time to get acquisitive,” reports Teresa Rivas for Barron’s. “The ‘too-big-too-fail’ threshold could eventually be raised to $250 billion in assets, from $50 billion, which would make smaller banks able to combine without becoming systemically important. Congress is also on the cusp of rolling back the financial rules put in place after the financial crisis, as well.”
Interest Rates, Too
Higher interest rates would help widen the difference between what banks charge on loans and pay on deposits, which would boost earnings for the financial sector. Regional banks are among the stocks most positively correlated to rising interest rates because higher rates improve net interest margins.
“Credit Suisse’s Susan Roth Katzke argues that even with decades of consolidation, the U.S. banking industry is more fragmented than other developed economies, with just half U.S. banking assets in the four largest banks, compared to 80% or more in other nations,” according to Barron’s.
Smaller banks could make for compelling targets for larger buyers looking to expand into new markets and add deposit share.
“JMP Securities’ Christopher York notes that the Fifth Third-MB Financial deal was the largest since 2015, and it could be the first of a wave of U.S. small and mid-cap bank M&A activity, particularly among banks small- and mid-size banks with similar characteristics as MB Financial,” reports Barron’s.
KRE, which follows the S&P Regional Banks Select Industry Index, is up about 11% this year. Year-to-date, investors have added nearly $374 million to the fund.
For more information on the financial sector, visit our financial category.