4. "We expect a pickup in the pace of merger activity among smaller banks."
Those on the lookout for mega-bank deals may be disappointed, but smaller regional banks may soon come to terms with low valuations, a weak outlook and the costs of new regulations, spurring consolidations with larger players, writes Lana Chan of BMO Capital Markets in a January research note.
"Many smaller banks are still struggling with lingering credit issues and weak loan demand from small businesses. In addition, these smaller banks do not have the scale to spread the costs of numerous new banking regulations. These factors should cause many of the affected smaller institutions to look to merge with other banks or sell themselves to larger Banks," writes Chan.
The most likely takeover candidates in 2012 are Wayzata, Minn., -based TCF Financial (TCB - Get Report) with $19 billion in assets and New York-based Sterling Bancorp (STL - Get Report) with $2.7 billion in assets as a result of a pickup in M&A, "through smaller banks merging or by larger banks acquiring smaller institutions in fill-in deals," writes Chan. BMO Capital Markets rates both banks "market perform", with price targets of $12 a share and $9 a share respectively - less than 12% premiums to current prices.Potential suitors include BBT (BBT - Get Report), Fifth Third (FITB - Get Report), M&T Bank (MTB - Get Report) and U.S. Bancorp (USB) among superregionals and BOK Financial (BOKF), Cullen/Frost Bankshares (CFR) and City National (CYN) among small cap banks, adds Chan. That M&A activity is contingent on targets coming to grips with a diminished outlook on profitability and takeover valuations. Chan notes that "