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This Bank ETF Could Benefit From More M&A Activity

January 5, 2020 9:37 am
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This Bank ETF Could Benefit From More M&A Activity

Mergers and acquisitions in the regional banking space picked up some momentum last year thanks in large part to BB&T's $66 billion purchase of SunTrust, a deal that created the bank now known as Truist Financial (NYSE:TFC).

That deal, dubbed a “merger of equals,” created the sixth-largest U.S. bank and was the first combination in the banking sector since the global financial crisis.

Coming off a year in which it gained 27.4%, the SPDR S&P Regional Banking ETF (NYSE:KRE), the largest exchange traded fund dedicated to regional banks, could be poised to benefit from more industry consolidation.

Why It's Important

The $2.03 billion KRE holds 122 regional banks – those banks that have $10 billion to $50 billion in assets. The weighted average market value of KRE's components is $10.8 billion, implying price points that would be tolerable for would be suitors.

Overall, there were 35 deals in the regional banking space last year – the highest tally since 1999 – and with the 2020 presidential election looming, buyers may be in a hurry to make purchases in the first half of this year.

“Bankers might have a short window to get those deals done,” according to S&P Global Market Intelligence. “Regional bank M&A is experiencing something of a sweet spot after regulators lifted a key asset threshold. But that could change after the 2020 elections, leading to some predictions that large deals will be front-loaded in the year ahead.”

Another catalyst for consolidation is that many of the most appealing regional banks, including some KRE holdings, have exposure to solid state economies such as Texas and Florida as well as other thriving areas of the Southeast.

What's Next

Some KRE components could make for attractive acquisition targets because they may need massive premiums to come to the table, an important factor in an environment where buyers are likely to be punished for overpaying.

“Investors said banks are less likely to pursue a traditional takeover deal,” notes S&P Global Market Intelligence. “The market has reacted negatively to high-premium transactions where a large bank buys a smaller one at a price above market value.”

Banking has also been fertile territory for consolidation. In 2000, there were nearly 10,000 U.S. banks. Today, that number is below 6,000.

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