Is the Joe Biden-era blockade on US bank M&A finally over?

Bank investors and advisers are preparing for a new era of consolidation among smaller US lenders that could help them fend off Wall Street’s giants.

KBW’s large and regional bank indices both gained more than 10 per cent respectively the day after Donald Trump’s election victory, the biggest rise in four years and one that trounced the 3 per cent increase in the tech-heavy Nasdaq.

While shares in some banks such as Goldman Sachs have risen in anticipation of higher advisory fees and looser capital rules, the potential for a more liberal attitude to tie-ups lifted shares in small and mid-sized lenders.

One banking deal has already been struck: Old National Bancorp, a regional lender in Illinois and Indiana with $54bn in assets, agreed to buy Midwestern group Bremer Financial for $1.4bn late last month.

“Unequivocally, the ‘Do Not Enter’ sign that stood in front of bank mergers has been removed,” said Bill Burgess, co-head of investment banking at boutique investment bank Piper Sandler.

“That is especially true for smaller banks where right now there are far more sellers than buyers, but all systems are go for a resurgence of deals.”

Although the number of US banks peaked in the 1980s at more than 14,000 and has been steadily declining, there are still more than 4,000, the vast majority of which are local minnows with a few billion dollars in assets.

Investors believe these smaller banks could be ripe for consolidation, caught between rising regulatory and technology costs and the relentless march of JPMorgan Chase’s asset-gathering machine.

“I feel pretty confident that over the next two to three years, consolidation in the regional banking sector will bring the number of banks down to 1,000 to 2,000 from 4,500 today,” Bob Diamond, the dealmaking former chief executive of Barclays, said on Tuesday at the Financial Times’ Global Banking Summit in London.

His current venture, Atlas Merchant Capital, plans to invest in mid-sized banks that are thin on capital after sustaining paper losses in securities or loan portfolios from faster than expected interest rate rises.

Atlas planned to “provide enough equity to acquire, one, two or three smaller private community banks where the synergies are immediate” because regulatory and technology costs can be shared, Diamond said.

Consolidation slowed to a trickle under Joe Biden’s administration, stymied by regulators which took a critical view to corporate tie-ups. As of late September, 507 bank mergers had been completed during his presidency, down 44 per cent from Trump’s first term, according to data from S&P Global.

The median time for a deal to be completed has also steadily increased under Biden, peaking at about six months in 2024. By comparison, the peak under Trump was less than five months.

Larger deals worth more than $500mn have been slower to close under Biden, averaging almost 10 months compared to six months under Trump, S&P data showed.

Regulators are scrutinising what would be one of the largest bank mergers in the past 15 years, Capital One’s proposed acquisition of Discover Financial. Since Trump’s victory, Discover’s share price has risen 20 per cent, a sign the market considers the deal more likely to be allowed to close under his administration.

The slow pace to get a deal approved created a chilling effect for banks to pursue some potential mergers, dealmakers said.

“You had to add it as a risk element before you decided to merge your company,” said Tom Michaud, chief executive of investment bank Keefe, Bruyette & Woods.

Last year’s regional banking crisis, which followed the collapse of Silicon Valley Bank, also failed to be the catalyst for mergers that some were predicting. In 2023, 112 US bank deals were completed and only 71 have closed this year, the lowest since the turn of the century.

Mid-sized banks with hundreds of billions of dollars in assets have lamented their struggles to do deals in an effort to bulk up and better compete with the biggest players such as JPMorgan and Bank of America, which benefit from their large scale to absorb increasingly burdensome regulatory, compliance and technological costs.

In a letter to regulators earlier this year, PNC chief executive Bill Demchak argued proposed bank merger rules would foster further dominance by the industry’s largest players such as JPMorgan and BofA. Pittsburgh-based PNC has more than $420bn in deposits, making it the country’s sixth-largest bank by deposits, but it lags far behind JPMorgan’s $2.4tn in deposits.

KBW’s Michaud said: “There’s a real urge to merge, for lack of a better phrase, because of the scale impact.”

However, even with the prospect of more amenable regulators, some of the country’s thousands of banks are reluctant to sell. There is renewed optimism about banks’ businesses with interest rates potentially staying higher for longer and hopes for fewer new rules from a second Trump administration.

Part of the reticence comes from a fear bosses have of being seen as abandoning their towns, where banks are often pillars of their communities as major employers and patrons which sponsor local parades and sports teams.

In one of the industry’s cautionary tales, the Philadelphia Inquirer labelled Terrence Larsen a chief executive who “took the money and ran” and “left Philadelphia poorer” when he sold CoreStates in 1998 for $17bn.

One senior investment banker said: “If you’re a bank in Pittsburgh, Minneapolis, Cleveland — that bank leaving that town and selling is traumatic for those communities and the CEOs of those banks know it.”

Bankers cautioned stock market investors may be getting too presumptuous about how aggressive banks would be even with amenable regulators.

Anu Aiyengar, global head of advisory and M&A at JPMorgan, said: “The equity markets are the most enthusiastic in terms of how life has changed [since Trump’s win]. Banks by definition tend to be more conservative. In bank land no one is jumping around yet saying let’s go in [for mergers].”

M&A advisers warn the new Republican administration has a strong populist agenda that is opposed to mega deals that could hurt consumers.

Mitch Eitel, managing partner of Sullivan & Cromwell’s financial services group, said: “I think there will be a shift in policy that will allow deals. But I think antitrust still remains a little bit of a question mark because we don’t know where that goes.”

“While a Trump administration is presumably business friendly it’s also presumably populist on antitrust enforcement and not trusting big banks”, he said.

Larger banks with pending regulatory issues may also find it harder to buy rivals under a more amenable Trump administration — almost two-thirds of US banks with more than $100bn in assets were deemed by the Federal Reserve to have “less than satisfactory” controls in at least one area of supervision, which includes anti-money laundering and compliance.

“We view this as an indication that bank M&A may remain challenging next year even after Donald Trump becomes president,” Jaret Seiberg, a financial research analyst at TD Cowen, wrote in a note to clients last month.

A gap between the expectations of potential buyers and sellers may also remain, particularly given a lack of certainty about the path of US interest rates.

“Most banks view themselves as a buyer,” said John Esposito, who heads the financial institutions group at Morgan Stanley. “And we need sellers in order to restart the M&A market.”

Esposito added: “It’s cautious optimism from bank clients about M&A. It should be better under Trump. If we can figure out the disconnect between buyers and sellers that would help.”

Additional reporting by Stephen Gandel and Brooke Masters