Bank M&A Deals Get Bigger, Kindling Hopes for Larger Buyers' Return

Bigger deals are slowly starting to accumulate.

Mergers involving smaller banks continue to dominate overall activity, but a few notable deals involving larger sellers have materialized in the last six months, including the planned sales of OneWest, Susquehanna Bancshares and City National.

Those transactions are creating buzz in the banking industry about the future of mid-tier institutions, or those with $10 billion to $50 billion in assets.

"We're coming out of the ice age," said John Roddy, senior managing director and global head of the financial institutions group at Macquarie Capital. "There's a degree of confidence that the largest 20 to 30 banks — excluding the very largest — could take a step and do deals."

The latest blip in deals involving midsize sellers is chipping away at the notion that such transactions are impossible or inadvisable. Such concerns largely revolve around M&T Bank's ongoing saga to buy Hudson City Bancorp — an August 2012 deal that has yet to receive regulatory approval.

The announced sales of Susquehanna in Lititz, Pa., and City National in Los Angeles have changed the narrative for larger bank M&A, indicating select opportunities for deals, if not a bit of a thaw, said Joseph Fenech, an analyst at Hovde Group. "Previously, we thought the midsize group was unsalable in the current regulatory environment," he said.

Vetting a deal with regulators well in advance of an announcement is a foregone conclusion, but even then an approval is far from assured. Still, given the risks of getting caught in regulatory limbo, analysts said banks pursuing bigger deals have likely gone to great lengths to get as much of a positive indication from regulators as possible.

Surprisingly, several analysts said the Federal Reserve Board's annual Comprehensive Capital Analysis and Review exercise — once considered an impediment for larger M&A — could now be a confidence booster. Banks could use the process to indicate an interest in acquisitions, and vet the Fed's potential approval, before they find a specific target.

"At this stage of the regulatory regime, you have buyers who are on the record with their interest in M&A in their capital plans with the Fed," said Chris McGratty, an analyst at Keefe, Bruyette & Woods. "You can pretty much trust that these guys have done their homework because the regulatory environment is so severe. There's no upside in surprising the regulators with a deal."

The CCAR process in M&A is particularly poignant for BB&T, which had its capital plan rejected a few years ago for qualitative reasons. Now BB&T has several deals planned, including its agreement to buy Susquehanna.

"The last thing BB&T would want is another stumble," Fenech said. "You almost have to guarantee that they engaged the regulators in every way possible in vetting their deal."

Of course, a thaw for bigger deals is provisional. While announcements are positives, the real proof of progress involves banks' abilities to get the deals done.

"It is more hope than experience right now," Roddy said.

Though the emergence of larger buyers could spur activity, analysts like Fenech said there could also be mergers of smaller, but similar-sized, regionals. Still, Roddy said he thinks such mergers are less likely than acquisitions by bigger banks.

"There might be one or two, but that middle group is pretty thin and it would be challenging in terms of geography and culture," Roddy said. "You need a lot of things to fall in line for an MOE-like deal … In that group there's a bit of cult of personality around the CEO."

Social issues can certainly complicate transactions, but they should come second to a deal's dynamics, said John Kanas, chief executive of the $19 billion-asset BankUnited in Miami Lakes, Fla.

"If economic transactions make sense they will force people's hands on the social issues," he said. "We've been talking to other banks for two years — smaller, larger and same size. We just haven't found it yet."

Kanas, meanwhile, said he would be "open" to BankUnited selling or merging in a deal where another CEO emerged as the leader.

"We try to not start with personalities," Kanas said. "We start with what makes good financial sense to the shareholders. We look at any institution that would complement the value of BankUnited."

Fenech wrote in a note last month that BankUnited could benefit from City National's sale to Royal Bank of Canada. That deal "furthers the notion that a pick-up in mid-sized bank M&A is close at hand, which has obvious positive implications" for BankUnited, Fenech wrote, adding that BankUnited could be a possible seller in the next year or two.

Kanas said consolidation of midsize banks makes sense, especially as cost-cutting opportunities and reserve releases dry up.

"I think it is a logical at a time like this to look for deals that are driven mostly on cost saves," Kanas said. "Bankers are starting to make next year's budgets and are not pleased."

Further, Kanas said pinning hopes on interest rates rising is distorting the dynamics of the yield curve.

"Many of us believe that it will be late 2015, but what if the Fed starts moving short-term rates but the long-term doesn't follow?" Kanas said. "The pressure could get worse with the further flattening or — God forbid — an inversion of the yield curve."