The banking environment is shifting. U.S. Treasury Secretary Janet Yellen recently suggested that bank mergers are more likely, given the banking crisis this past spring and pressures from higher interest rates. Moreover, both Yellen and the Acting Comptroller of the Currency Michael Hsu have indicated openness to bank mergers, boosting expectations for more deal activity.
The economic environment also is a clue that more consolidation may be coming. Mirroring the broader U.S. economy, the banking sector is in a volatile place. The differences between the top- and bottom tier performers are wide, leading to opportunities for M&A activity. Shares of large banks have rallied sharply in recent months, while those of smaller regional and community banks have shown modest gains. Consolidation in fact may be healthy for the banking industry, especially as smaller regional banks continue to see deposit outflows and slowing loan growth. Earnigns reports for the second-quarter of 2023 highlight this disparity between large and small banks. For stock investors, in addition to financial metrics including net-interest margin and loan-to-assets ratios, when considering which banks to back, these characteristics say a lot about how and whether a bank and its management are prepared for the current market climate: 1. Don’t wait for certainty: Volatility and uncertainty will continue. While it can be tempting to wait until there is more information, the cost of inactivity is typically greater than deciding with incomplete data, even if pivots are required later. If banks focus on being more nimble and able to change strategy quickly, they can reduce the cost/challenge of making pivots when required. As an examp …
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