NEW YORK ( TheStreet) -- Banks are cheap, but nobody is buying.

While some of the nation's most recognizable banks trade at a fraction of their book value and news from Europe indicates banks across the Atlantic may need to sell U.S. assets at fire sale prices, few big deals have emerged. It may be time for the post-crisis bank consolidation narrative to be tweaked. Below are five ways the industry is changing the bank M&A narrative.

5. "Just because the M&A cycle hasn't started doesn't mean there won't be one."

As bank prices fell and European stress intensified in the last quarter of 2011, U.S. bank deals dropped 90% compared with 2010 - but that doesn't mean it's a lasting trend, says Christopher McGratty, a bank analyst with KBW.

"Those that say bank M&A is dead may be a bit short sighted. Good properties and good assets are still going to get premiums, even in this kind of market," says McGratty. He expects that mergers will accelerate over the course of 2012 as asset values bottom out - the trend will be especially true if bank stock prices rebound, alongside a wider economic recovery. McGratty says to focus on banks with solid deposit franchises and operations in markets with strong demographics and growth prospects like the Midwest and, particularly, the Chicago area.

"We expect the pace of M&A to pick up over the course of the year," says McGratty, who believes that stronger banks will use M&A as "one way to accelerate growth", while new regulations, a tough environment for operating margins and an oversupply of banks continue to cloud regional expansion plans.

Because of their deposit franchises, profitability and strong regional demographics, McGratty says that Boston Private Financial ( BPFH) with $6 billion in assets, Chicago-based First Midwest Bancorp ( FMBI) with $8.1 billion in assets, Bryn Mawr Bank Corp ( BMTC) of Pennsylvania with $1.75 billion in assets and Lake Oswego, Or., -based West Coast Bancorp ( WCBO) with $2.5 billion in assets may be the target of growth-hungry strategic buyers, over the next two-to-three years.

For more on bank picks see, 5 bank stocks that could jump on 2012 M&A and 10 community bank M&A targets.

KBW currently rates Boston Private, Bryn Mawr Bank Corp and West Coast Bancorp "outperform", while it gives a "market perform" rating to First Midwest. In the firms list of other potential sellers compiled in December, notable large names include Synovus Financial ( SNY), Regions Financial ( RF) and First Horizon National ( FHN), all with "market perform" ratings.

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) with $19 billion in assets and New York-based Sterling Bancorp ( STL) 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), Fifth Third ( FITB), M&T Bank ( MTB) 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 " It appears that many of these smaller banks have not yet accepted that an environment with slower economic growth, weaker bank profitability, and lower valuations is likely to be normal." Chan adds, "Based on discussions with management teams, there have been fewer than expected mergers involving smaller banks as there is a considerable gap between buyer and seller pricing expectations."

For M&A to pick up, look for the expectations gap to fall, or for a weak outlook on loan demand and still problematic credit and regulatory issues to push some players towards consolidation.

3. "If I were a stressed bank, I wouldn't expect much interest outside of an assisted deal."

After a wave of mergers among large banks during the crisis, there's been less post-crisis consolidation than many expected as some some banks came near collapse, while others survived with strong prospects. "Doing an open good bank deal is probably pretty challenging right now," says Mark Sponseller a managing director of Alvarez and Marsal's Transaction Advisory Group.

Some of the biggest consolidations like Bank of America's ( BAC) $50 billion purchase of Merrill Lynch, Wells Fargo's ( WFC) buy of Wachovia and PNC's ( PNC) acquisition of National City in the fall of 2008 and JPMorgan's ( JPM) takeout of Bear Stearns earlier that March reshaped some of America's largest banks. As larger banks hit the deals sideline with a vengeance post-crisis, the common theme is a lack of government assistance in consolidations.

After the multi-billion dollar takeovers of IndyMac and BankUnited ( BKU) by private equity buyers with the help of Federal Deposit Insurance Corporation guarantees, a pullback in assistance programs on consolidations among struggling players - in addition to an aversion for Federal Reserve-backed "Too Big To Fail" mergers - has led to a significant drop in large U.S. bank deals.

For banks struggling to repay TARP funds or those with still weak capital ratios, a lack of assistance in doing deals, along with new regulations may be preventing M&A. "Putting restrictions on private equity and locking them up has limited the amount of options for struggling banks to attract capital," says Sponseller. As a result, he expects few large mergers in the near future outside of superregionals looking to wrench out synergies through a consolidation.

Nevertheless, European banks potentially looking at asset sales to raise capital for an escalating crisis may move the deals market forward. "A lot of my clients are bullish on the opportunities that are coming out of Europe, whether they in Europe or in the U.S.," adds Sponseller. In 2011, three of four billion dollar plus deals involving U.S. bank assets involved a foreign seller, notes Chan of BMO Capital Markets.

Those deals included Capital One's ( COF) still to be completed $9 billion deal for ING Direct ( ING), PNC's ( PNC) acquisition of RBC's ( RBC) U.S. retail bank for $3.45 billion and First Niagara's ( FNFG) $1 billion purchase of HSBC's ( HBC) upstate-New York bank branches. The only U.S. consolidation over $1 billion was Comerica's ( CMA) purchase of Sterling Bancshares for $1.03 billion.

2. More asset purchases likely.

While traditional bank M&A may continue to be sluggish at the open of 2012, deal activity could be driven by asset purchases, especially as European banks look for quick ways to raise capital. "As banks increasingly seek to bolster and diversify earnings, we expect near-term deal activity to be dominated by asset generating targets i.e. aircraft and rail leasing, ABL, factoring, indirect auto, card and non-bank businesses," writes Andrew Marquardt of Evercore Partners in a January research note.

Currently, European giants with significant U.S. operations like Royal Bank of Scotland ( RBS) and Santander ( STD) have begun to shop their non-European businesses and specialty assets like aviation finance arms, while U.S -based Regions Financial ( RF) has been in up and down discussions to sell its brokerage Morgan Keegan and Citigroup ( C) has sought a buyer for its consumer lending unit OneMain. While, both assets have seen deal talks stall in recent days, they're indicative of the businesses that capital hungry banks may look to divest.

We project a rebound in deal activity in 2012 as capital deployment gains steam post capital analysis and review , banks continue to seek asset generating opportunities, seller expectations likely become more reasonable amid a still challenging macro backdrop, and as foreign banks pursue asset divestitures to generate needed capital," writes Marquardt. Evercore expects M&A to pick up with asset purchases most likely as some banks seek to grow assets, while sellers accept prices that make purchases more attractive.

1. "M&A potential real, but not necessarily a near term catalyst."

Underneath all expectations of bank consolidations is the disclaimer that deals are subject to an improving economy, which will push the value of bank assets and stock prices upwards. With U.S. growth still sluggish and stock gains muted in 2011, many now expect that momentum in the economy and the deals market will be deferred to the second-half of 2012.

"We believe that bank M&A will pick up in the second half of 2012 as Troubled Asset Relief Program TARP repay catalysts emerge and the economy progresses and as a result, we believe there is a meaningful opportunity for the group to outperform the rest of the financial sector in 2012," writes Jefferson Harralson of KBW in a January research note. Harralson adds that consolidations are most likely among small-to mid-cap banks, because of looser regulatory restrictions such as a lack of impact from the Durbin Amendment - and a lack of European exposure.

"The small- to mid-cap banks have greater prospects for impactful M&A for both buyers and sellers and as a result the opportunity for more impactful cost savings and earnings leverage. The SMIDs have no Euro exposure, no initial Durbin impact for less than $10 billion banks , and the ability to take market share from the larger banks, in our view," writes Harralson.

Meanwhile, potential bank investors looking for an M&A catalyst should have a healthy amount of skepticism. "While there has been some M&A activity over the last few quarters, we believe a major uptick in activity is unlikely unless shares of potential buyers show material improvement and/or seller expectations become more realistic," writes Robert S. Patten of Morgan Stanley in a January research note.

"If you are looking at an M&A trade, you have to be careful," adds McGratty of KBW.

-- Written by Antoine Gara in New York

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