Banks endure M&A drought

November 24, 2010, 4:33 PM UTC

This year’s M&A rebound has passed the banking industry by.

Mergers and acquisition deals are on the rise, particularly in hot sectors like energy. But banks, still licking their wounds after a giant housing bust and an anemic recovery, are sitting out the M&A fun.

The urge to merge passes

Indeed, banking industry mergers are on pace for their lowest total in at least 20 years, according to data released Tuesday by the Federal Deposit Insurance Corp. Banks and thrifts have done 124 mergers this year – compared with an average for the past decade of 332 and a recent peak of 725 in 1997.

There are plenty of reasons. Many banks have to shore up their capital before they could make a purchase. After years asleep at the switch, regulators are vigilant about approving mergers even in cases where bankers see a deal they want to pursue: The American Banker notes two recent cases in which regulators have cracked down on would-be purchasers.

And there is the unsteady state of the economy and the still sickly condition of many bank balance sheets. Consider the sale this month of Wilmington Trust (WL), the Delaware-based wealth manager that tried to ride out a spate of bad bubble-era lending decisions but ran out of time and had to sell at a 45% discount to its stock market value.

The beneficiary in that case was M&T (MTB), a Buffalo-based lender that has been both expansion-minded and conservative in managing its balance sheet.

Wall Street is betting some of the larger regional banks, such as Regions Financial (RF), KeyCorp (KEY) and Marshall & Ilsley (MI), will find themselves in Wilmington’s shoes thanks to persistent high unemployment and falling house prices.

Those trends will punish smaller banks as well, but many of them will simply fail, adding to the 149 banking institutions that have gone under this year. But it is widely assumed the regulators, regardless of how stringent they might like to be with mergers, will not permit a large bank to fail – which could lead to a re-enactment in the first half of next year of the fire sales that handed Cleveland’s National City to PNC (PNC), for instance.

If so, the banks could yet get their merger wave – though it might not be one that regional bank investors will have much fun riding.