A trio of regional banks face increasing pressure on returns and profitability that makes them potential targets for acquisition by a larger rival, according to KBW analysts.
Banks with between $80 billion and $120 billion in assets are in a tough spot, says Christopher McGratty of KBW. 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 larger to help pay for coming regulations — or struggling for years.
Of eight banks in that zone, Comerica, Zions, and First Horizon might ultimately be acquired by more profitable competitors, McGratty said in a Nov. 19 research note. Zions and First Horizon declined comment. Comerica didn’t immediately have a response to this article.
While two others in the cohort, Western Alliance and Webster Financial, have “earned the right to remain independent” with above-peer returns, they could also consider selling themselves, the analyst said.
The remaining lenders, including East West Bank, Popular Bank, and New York Community Bank each have higher returns and could end up as acquirers rather than targets. KBW estimated banks’ long-term returns including the impact of coming regulations.
“Our analysis leads us to these conclusions,” McGratty said in an interview last week. “Not every bank is as profitable as others and there are scale demands you have to keep in mind.”
Banking regulators have proposed a sweeping set of changes after higher interest rates and deposit runs triggered the collapse of three midsized banks this year. The moves broadly take measures that applied to the biggest global banks down to the level of institutions with at least $100 billion in assets, increasing their compliance and funding costs.
Why It Matters
Folks, it’s time to pay attention to the risks facing our regional banks. KBW analysts are warning that banks like Comerica, Zions, and First Horizon might be taken over by bigger, more profitable rivals.
These banks, with assets between $80 and $120 billion, are struggling to keep up with regulations and maintain returns. This could lead to them being swallowed up by larger competitors, which means less choice and potentially higher costs for us, the customers.
We need our regional banks to stay competitive and independent, but with increased compliance and funding costs, it’s getting tougher. Let’s support our local banks and keep an eye on the regulations that may be pushing them towards the edge.
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