Regional Banks May Soon Be Buyers

Don't be surprised to see large regional banks making acquisitions in the banking sector this year, as healthier banks are pushed to scoop up weaker competitors.

The federal government is expected to complete stress tests on the 19 banks with at least $100 billion in assets later this month. Some banks are expected to receive new cash infusions from the government or private sources after the tests, much of which will be needed to cushion the companies against rising losses. But analysts and observers also believe this recapitalization effort may be a pre-emptive move encouraged by regulators to position some banks to make acquisitions, as weaker competitors go under.

Large regional banks such as BB&T (BBT Quote) , SunTrust (STI Quote), KeyCorp (KEY Quote), US Bancorp (USB Quote) and other banks with market caps between $2 billion and $20 billion are the "logical consolidators," says Robert Patten, an analyst at Morgan Keegan.

"While these banks may not need the capital because of credit, our view is that the regulators may need these banks to take the capital in order to take care of the consolidation, which must happen," Patten says. "[T]hose consolidators will likely get flushed with capital -- whether they want it or not."

Large banks currently have their hands full digesting recent acquisitions that for the most part were either forced, federally assisted or both.

The other problem is that several large banks are coming dangerously close to hitting the national 10% deposit market share limit, which will make it hard for the companies to acquire any significant-sized bank holding company.