The US's banks have largely sat out the mergers and acquisitions wave of recent years. While deal records have fallen in almost every other sector, big banks have done almost nothing, shrinking rather than expanding. And merger activity among small and mid-sized banks — some 5,607 of them, at last count — has been subdued.
But when Fifth Third Bancorp of Cincinnati revealed its $4.7bn swoop for Chicago's MB Financial on Monday morning, shares in other Chicago-area banks began to move, too. Wintrust, a similar-sized bank based in Rosemont, Illinois, ended the day up almost 4 per cent, while First Midwest of Itasca closed up 3 per cent.
The implications were obvious: after years of thin activity in bank M&A, this deal could mark a turn.
The conditions for dealmaking look better than at any time since the financial crisis. Higher interest rates and lower taxes have pumped up bank profits, giving management teams stronger platforms from which to contemplate doing something radical. Data released on Tuesday by the Federal Deposit Insurance Corporation showed that net income across the banking industry rose 27 per cent from a year earlier in the first quarter, to a record $56bn.
Shareholder activists have also begun to flex their muscles, calling for fresh ways to boost returns at Ally Financial, Comerica, Citigroup, Morgan Stanley and Regions Financial, among others.
And then — most importantly — there is the shifting regulatory landscape.
For much of the post-crisis period, agencies generally frowned on any transaction that might make a bank bigger, more complex and tougher to police. Several proposed combinations were abandoned because regulators took too long to approve them, among them New York Community Bancorp's bid for Astoria Financial and Investors Bancorp's move on The Bank of Princeton. A $5.3bn tie-up between M&T Bank of New York and Hudson City Bancorp of New Jersey took more than three years to limp over the finish line.
Now, under the administration of Donald Trump, there are clear signs that attitude is changing. Last year, the Federal Reserve made it easier for banks to merge by lifting the combined size threshold that would trigger a much deeper regulatory probe, from $25bn in assets to $100bn.
On top of that, the Fed is considering a change to the way it grades banks' management teams, moving from a five-point to a four-point scale. In practice, said Rodgin Cohen, senior chairman at Sullivan & Cromwell, that may mean many managers will be bumped up from a grade 3 ("less than satisfactory") to a grade 2 ("satisfactory"). In the past, a three-rating has been an effective bar on doing deals, keeping many would-be acquirers on the sidelines.
Another spur to consolidation comes with the new bank-relief bill passed on Tuesday by Congress, which is set to free small and mid-sized lenders from many of the restraints that apply to the trillion-dollar banks such as JPMorgan Chase and Bank of America.
What does the new bank-relief law change?
Financial stability regulation: Raises the size threshold at which the strictest supervision kicks in from $50bn in assets to $250bn.
Volcker rule and bank capital requirements: Exempts small banks with assets of under $10bn from the Volcker rule ban on proprietary trading.
Mortgage lending rules: Makes it easier for small banks to offer mortgages by increasing legal protection and reducing data requirements.
The most obvious "winners" are regional banks in the $50bn-in-assets to $100bn bracket, said Quyen Truong, a Washington-based partner at Stroock & Stroock & Lavan.
She noted that such banks now find themselves freed from all of the Fed's "enhanced prudential standards" — tougher capital and liquidity requirements, leverage and lending limits, mandatory risk committees and resolution plans, as well as the annual stress test. Banks between $100bn and $250bn in assets will still face periodic stress tests, but will be exempted from other tougher standards 18 months after the date of the bill's enactment.
All of which suggests that more bank acquisitions are likely. "I think we are at a potential real tipping point," said Mr Cohen. "You've got positive incentives to do deals, and the removal of obstacles to do deals."
The one caveat, for now, is the valuations of bank stocks. Shares in Fifth Third slumped the most in almost two years on Monday, down 8 per cent, after investors turned their nose up at the MB deal. In particular, they criticised the meagre 2 per cent boost to earnings per share next year — even with some very aggressive assumptions on cost-cutting — and the projection it will take seven years to overcome the hit to tangible book value, which is much longer than the three to five years that is normal for bank acquisitions, according to M&A bankers.
Chris Marinac, co-founder of FIG Partners, an Atlanta-based research and advisory boutique, said Fifth Third may have been bounced into a deal, following rumours of interest in MB from other potential acquirers last week. Two of the banks linked to MB, US Bancorp and Bank of Montreal, declined to comment.
Fifth Third's share price slide was "clearly a wake-up call" for other potential acquirers, said Mr Marinac. "You've got to have your transaction buttoned up and with a quicker payback period."
If dealmaking does begin to pick up, investors may ultimately look more kindly on banks that move early rather than miss out on potential partners. On Tuesday, Fifth Third's stock recovered some of the lost ground, closing up 3 per cent.
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