Will U.S. Bancorp's Branch Deal Start a Big-Bank M&A Thaw?

For the biggest banks in the country, M&A has been as cold as Chicago in January. But U.S. Bancorp's (USB) latest move has the rest of the industry watching the thermometer.

The Minneapolis bank's $315 million deal to acquire 94 branches in Chicago from the U.S. arm of Royal Bank of Scotland would give it more heft in Chicago, raising its deposit share there from 12th to at least 9th. Potentially more important is whether it will ease the way for more, and bigger, acquisitions by large banks.

Industry observers have concluded in the last few years that regulators have barred the largest banks from meaningful M&A. Many deals in recent years among the next tier — regional and midsize banks — were approved after protracted reviews or are still dragging on.

But the $361 billion-asset U.S. Bancorp, with its stellar reputation, is the perfect candidate to test for any warming of regulators' attitudes.

"What you have is the gold standard of the industry doing a very small and special transaction, but any deal is better than what we've seen," says R. Scott Siefers, an analyst at Sandler O'Neill. "Hopefully this starts to debunk the notion that the largest banks are precluded from doing deals period."

But U.S. Bancorp executives have seemed to downplay their interest in open-bank M&A. Chairman and Chief Executive Richard Davis described a barren bank M&A market during his second-quarter conference call and then later in 2013 essentially said he was reluctant to take the risk of buying a bank with hidden problems that could blow up later, as happened to several large banks that made acquisitions during the financial crisis.

Davis' stance remains the same, the company says. U.S. Bancorp just found a deal that has limited risk because it involves branches, $5.3 billion of deposits and $1.1 billion of cherry-picked loans, says one of his executives.

"In the regulatory world we live in today, you have to understand exactly what you're buying today and all of the facets of the operation and understand if there is any significant liability that could accrue," says John Elmore, vice chairman of community banking and branch delivery for U.S. Bank. "Here, you have a large financial institution that is selling part of their franchise… and we could get comfortable with the part of the business that we are acquiring."

Tod Perkins, managing director and head of depository institutions at Barclays, says larger banks will likely look at more M&A possibilities this year but that there will be few deals.

"I think you're going to see big banks do fill-ins and smaller transactions, but it's unlikely that we'll see any blockbusters," Perkins says. "With regard to future transaction structures, the trend will be to mitigate compliance risk."

The deal still needs regulatory approval and is expected to close by midyear. For RBS, it is part of a housecleaning intended to improve its profitability in advance of the initial public offering of its U.S. arm, Citizens Financial Group in Providence, R.I. RBS is expected to sell a portion of its stake in that offering this year and fully divest itself from Citizens by 2016.

"To actually tier up our market share position in Chicago would have required a lot of time and commitment and we plan to use the capital elsewhere," says Bruce Van Saun, chairman and chief executive Citizens. "I view Citizens with great potential but raw material. Our financial performance is not where it needs to be. We've diagnosed how to improve it, and this transaction is a bridge to fund some of those investments."

Working with Bank of America Merrill Lynch to market the branches, Van Saun said there were a number of banks interested in the Citizens branches in Chicago.

"Clearly U.S. Bank had a desire to move ahead and complete this," Van Saun says. "They were the horse to beat."