Regional Bank M&A: Weekly Financial Recap

NEW YORK ( TheStreet) -- Financial stocks gained ground during the short week, fueled by more bank consolidation.

The Financial Select Sector SPDR ( XLF) rose a solid 2%, with help from regional bank stocks.

The Keefe, Bruyette & Woods Regional Bank Index jumped 5% this week. The index, which tracks 50 regional banks, is up a whopping 18% for the month of December.

Bank M&A speculation has picked up this year, with many industry observers pointing to small and midsize banks as ripe for consolidation. Observers say there will be many banks that decide to throw in the towel, particularly as credit headwinds persist and from revenue growth challenges caused by the overhauled financial reform measures ( not to mention a continued sluggish economy and lending environment.)

In recent weeks, bank M&A has picked up, fueling bank stocks higher as investors wait to see who's next on the takeout list. Last week the market was surprised by Bank of Montreal's ( MI) $4.1 billion offer for Marshall & Ilsley ( MI). This week, albeit a bit smaller deal, two Gulf Coasts banks decided to merge -- Hancock Holding ( HBHC) and Whitney Holding ( =WTNY). TD Bank ( TD) also picked up Chrysler Financial this week as it looks to expand into U.S. bank-owned auto lending.

Regional banks are also moving into positive territory as more banks prepare for 2011 by repurchasing preferred stock still held by the Treasury. While several banks have had to issue common equity in order to maintain capital levels once the government shackles are broken, the market seems to be in a giving mood.

Midsize and small banks including Huntington Bancshares ( HBAN), Webster Financial ( WBS), Susquehanna Bancshares ( SUSQ) and Heritage Financial ( HFWA), have either announced or completed TARP repurchases this week.

Elsewhere in the financial sector this week, outgoing New York Attorney General and governor-elect Andrew Cuomo is suing Ernst & Young over its role as auditor to Lehman Bros. Cuomo alleges that Ernst & Young assisted Lehman in "engaging in an accounting fraud involving the surreptitious removal of tens of billions of dollars of fixed income securities from Lehman's balance sheet in order to deceive the public about Lehman's true liquidity condition."

Deutsche Bank ( DB) paid $550 million to U.S. regulators and entered into agreements with the U.S. Justice Department and the Internal Revenue Service to settle a tax-shelter probe related to client transactions from 1996 to 2002.

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