This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
TheStreet Open House

Bank Consolidation Will Center on This U.S. City

NEW YORK ( TheStreet) -- The consolidation of the U.S. banking industry is gaining steam, and Chicago may be the ripest major market for takeovers, according to KBW analyst Christopher McGratty.

Thousands of small banks are trying to scrape together decent profits amid low interest rates and weak loan demand.

There were about 7,150 banks in the U.S. as of Dec. 31, declining from 9,321 at the end of 2007, according to data provided by Thomson Reuters Bank insight. There were 465 bank failures during that period, and many more banks were forced to sell because of low credit quality and an inability to raise sufficient capital to remain independent.

Still, the health of the banking industry has clearly improved, as the dramatic slowdown in bank failures and the rally in bank stocks have shown. There have been only three bank failures this year, following 51 closures during 2012. The peak was 2010, when 157 institutions were shuttered by regulators.

But all is not well for thousands of community banks, facing low interest rates on which it's hard to make a profit, weak loan demand and expensive, ballooning regulations.

According to the FDIC's most recent data, aggregate industry profitability has rebounded, with a return on assets of 1.02% for the first three quarters of 2012, and a return on equity of 9.02%. Those figures have improved steadily since 2009, when the industry had an aggregate operating loss.

But industry figures can be deceiving because they are so heavily weighted to the largest banks. According to preliminary year-end data supplied by Thomson Reuters Bank Insight, there were 1,215 banks with returns on average assets (ROA) below 0.25% during 2012, while 1,317 had returns on average equity (ROE) of less than 2.5%. Those are weak returns, and smaller banks' boards tend to be dominated by local investors, who eventually will feel the need to cash out of lower-paying investments and seek greener pastures.

Potential buyers' improved earnings and capital levels may also spur industry consolidation. Looking at the FDIC's aggregate data, the industry's core capital ratio -- or Tier 1 leverage ratio -- was 9.28% as of Sept. 30, increasing from 7.97% five years earlier.

1 of 3

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
DOW 17,155.57 +124.43 0.73%
S&P 500 2,000.95 +16.82 0.85%
NASDAQ 4,550.29 +31.3880 0.69%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs