Regionals won't be making any major deals. Here's why

At first blush, industry conditions appear ripe for dealmaking. Banks are flush with capital and tax savings. Regulation-lite is in vogue. Commercial lending — the lifeblood of large regionals — is in the dumps. And deposit growth is getting harder except for maybe the largest banks.

But regional bank CEOs have made clear in recent days that major acquisitions are all but off the table at the moment.

There are a number of reasons why — the most immediate being the recent slump in bank stocks, which has made buying back shares an attractive option for deploying capital. Since the beginning of the year, the KBW Nasdaq Bank Index has declined 7%, while shares of large regionals such as KeyCorp (down 12%) and Citizens Financial Group (down 17%) have slid more.

Perhaps more importantly, though, banks are focused on safer deals for specialty services and on making big investments in technology. During the third quarter, banks have reported large step-ups in their digital investments compared with a year earlier, and CEOs have defended their spending on better mobile apps, online lending platforms and back-end systems as high priority.

“The overall banking industry is really at an inflection point, in a massive period of change, where you have to move to a digital business model,” Citizens Chairman and CEO Bruce Van Saun said in an interview Friday. In addition to selling products and services through a branch network, banks now have to use data to personalize marketing offers and provide a better customer experience online, he said.

“To me, getting that right and making the investments there is job one,” Van Saun said. “If you bought a branch system, that could distract you.”

Citizens in August completed its acquisition of Franklin American Mortgage. The deal provided a boost to fee-based revenue at the $158.9 billion-asset company. Noninterest income climbed 9%, while mortgage banking fees nearly doubled.

During a conference call with analysts Friday, Van Saun said that while the Franklin acquisition has gone well, he has no imminent plans to the buy another mortgage lender. Instead, if Citizens were to consider a deal, it would be to help the Providence, R.I., company scale up in niche areas such as capital markets, or wealth management for ultrahigh-net-worth customers, he said.

“There are some very specific things on the shopping list that make strategic sense,” Van Saun said during the interview. “If we can find the right firm at the right price with the right culture, we’ll look to do those things."

Over the past year, regional bank M&A has primarily focused on nonbanks, such as boutique investment firms and insurance companies, despite predictions for bank deals to pick up for a number of reasons, including the deregulatory push in Washington and the increasing competition for deposits.

Associated Banc-Corp, for instance, acquired three nonbanks, including two insurance firms. BB&T bought an insurance division from one of its peers, Regions Financial. Key and MUFG Union Bank, meanwhile, have acquired investment and capital markets companies.

Philip Flynn, the CEO of the $33.5 billion-asset Associated, said Thursday during an earnings call that the Wisconsin bank's purchase of the much smaller Bank Mutual early in the year had gone well enough that he would consider in-market bank deals that would not unsettle investors.

“We are well aware of how the market seems to feel about … acquisitions which seem to extend a franchise," Flynn said.

Executives at larger regionals were even more restrained in their comments.

Asked Thursday whether Key would consider buying another bank, following its acquisition of First Niagara two years ago, the $137.9 billion-asset company made it clear that additional bank deals are off the table for now.

“We do not believe that is something that’s necessary to deliver against our operating model, and have not been focused on bank M&A,” said Don Kimble, the chief financial officer at Key.

However, the Cleveland company would consider “very small investments and acquisitions” similar to the deal it closed a year ago for Cain Brothers, a boutique investment firm focused on the health care industry.

BB&T Chairman and CEO Kelly King — one of the industry’s best-known dealmakers — also told analysts not to expect a string of bank deals anytime soon.

“To be honest, I don’t expect to see a lot of big M&A, big bank mergers. I really don’t,” King said during the Winston-Salem, N.C., company’s quarterly earnings call Thursday. “At one time I did, as you know, but I don’t expect to see that today.”

The opportunities to improve efficiencies of scale are no longer what they once were, King said. He pointed to efforts among organizations such as The Clearing House and Bank Policy Institute to take a “utility concept” to building technology and other systems.

“Historically, I thought in terms of you had to get your scale to get your cost per unit down because you had to build all of these systems yourself,” King said. “We’re now looking at some systems improvements where we’re not going to have to build it ourselves.”

At Citizens, the acquisition of Franklin came at an opportune time, according to Van Saun.

Across the industry, mortgage fee income has plunged because of soft refinancing activity and lower gain-on-sale margins. Van Saun said he expects nonbank firms, which have flocked to the mortgage industry, to exit the business in response.

Citizens is “well placed to make it through the vicissitudes of the market,” Van Saun said.

Laura Alix and Paul Davis contributed to this article.