According to McKinsey & Co, bank stocks are in a precarious position. The consulting firm said it believes that more than half of the world’s banks are unlikely to survive an economic downturn, as their costs have begun to outpace returns on equity. The firm pointed to rising competition for customers, as fintech gains momentum and big names like Amazon (NASDAQ:AMZN) start to poach would-be customers.
Bank Stock Consolidation Ahead
What’s a traditional bank to do? According to McKinsey, the answer is growth. At this late stage in the economic cycle, the firm said, banks must be considering mergers in order to realize cost synergies, free up cash, and invest in the future. With all of that in mind, McKinsey sees a flurry of M&A activity surrounding bank stocks in the year ahead.
More than half of the world’s banks are too weak to survive a downturn, McKinsey says https://t.co/GTu2sWA4MC
— Bloomberg Markets (@markets) October 22, 2019
That prediction aligns with what Deloitte forecast at the beginning of 2019. Back then, Deloitte analysts pointed to lower valuations and merger-friendly tax reform as reasons for more consolidation within the sector; but so far those predictions haven’t materialized. Part of the reason for that has been a lack of necessity— most banks aren’t willing to give up their own identity for the sake of a merger unless they’re in a tight spot. However, as the financial sector becomes increasingly vulnerable to competition, consolidation among bank stocks is looking much more likely.
The BB&T’s acquisition of SunTrust Banks Inc. is the only large banking sector buy to make waves on Wall Street so far this year. Many believed it would pave the road for more M&A activity among bank stocks, but so far there’s been little movement on that front.
Potential Takeover Targets
If McKinsey’s forecast is anything to go on, now is the time to start evaluating potential takeover targets in the banking sector. While predicting M&A activity is far from an exact science, there are a few qualities that make some bank stocks look more vulnerable to a sale than others.
Regional banks are likely to be the first to combine as the industry starts to consolidate because regulators are unlikely to allow any major acquisitions among the top-tier banks. While smaller banks have some incentive to increase their footprints, those with assets well above $50 billion will see the most benefit from a merger. That’s because the FDIC has more rigorous standards for banks with assets over $50 billion, so those who are near or below that level will be hesitant to expose themselves to the regulatory headache and resulting costs of entering the new bracket.
The next factor to look at is return on equity. Bank stocks with low ROE could be open to a sale, as they would see the most benefit from the cost synergies that the new organization would provide. On top of that, share price will probably play a role in who’s being hunted as potential acquirers will be looking for a good deal.
5 Bank Stocks to Watch
With those criteria in mind, there are a handful of regional bank stocks to consider. Among them, Comerica Inc. (NYSE:CMA), Citizen’s Financial Group (NYSE:CFG), Fifth Third Bancorp (NASDAQ:FITB), Regions Financial (NYSE:RF), and KeyCorp (NYSE:KEY) look like prime targets.
All five have P/E ratios below 12, and though CMA is an outlier with ROE of 16%, the other four are all below 12%.
|Symbol||Company Name||Last Price||Return on Equity||P/E|
|CFG||Citizens Financial Group Inc|
|FITB||Fifth Third Bancorp|
|RF||Regions Financial Corp|
Pressure on PNC
Another bank stock to have on your radar is Pittsburgh’s PNC Bank (NYSE:PNC), which will lose its position as the ninth-largest bank by assets once the BBT/SunTrust deal is final. With $5.6 billion in cash on the balance sheet, PNC’s management could be looking to increase its presence by acquiring one of its smaller peers.
As of this writing, the author did not hold a position in any of the aforementioned securities.
Disclaimer: The above should not be considered trading advice from CCN.com