The U.S. banking sector may be headed into a new wave of mergers and acquisitions, as fears of a U.S. recession dissipate and regulators adopt a more favorable tone.
This represents a turnaround in the environment from 2021, when M&A activity volumes for the U.S. banking industry dropped from a historical average of 200 to 300 deals per year to between 100 and 150, reflecting a stricter regulatory environment.
“We believe bank M&A would have already picked up had it not been for the elevated uncertainty brought about by the recent tariff announcements,” says Manan Gosalia, Morgan Stanley’s Head of U.S. Midcaps Banks Research. “With several ongoing tariff negotiations reducing macroeconomic risks, deal activity should begin to pick up in the second half of this year.”
Still a Fragmented Industry
The number of U.S. banks has fallen 75% in the past 40 years amid a strong push for consolidation. But despite that decline, the country’s banking industry is still one of the most fragmented in the world, with 4,487 banks at the end of 2024, the majority of which have assets of less than $10 billion.
“Small banks account for most of the M&A activity across the industry, indicating that there is still no shortage of potential sellers over the coming years,” Gosalia says. “As a result, consolidation will remain a fundamental theme for the industry given the numerous benefits of M&A.”
Banks use M&A to gain access to new markets and capabilities, by expanding their regional footprints as well as larger customer data sets to build out their AI models.
“Investments in technology, product, branches and brand are key to growing core deposits, and scale allows banks to spread these investments over a broader base of revenues,” Gosalia says.
Regulator Tone Has Shifted Positively
In addition to lower deal volume overall, acquisitions of U.S. banks with more than $50 billion in assets have been scarce – a trend analysts attribute to more stringent merger review criteria under the prior federal administration.
Now, regulators under the new administration are indicating that they will be more flexible.
For the first time since the 2007-2008 global financial crisis, agencies such as the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC) are easing rules for the industry, with some of them making public statements in favor of bank M&A deals.
Investors in banking stocks are following these developments closely, as consolidation tends to have an impact on share value, even if delayed.
“Historically, banking M&A deals have not been an immediate boon for acquirers,” Gosalia says. “However, after one year, relative performance begins to skew slightly positively, with a median 110 basis points outperformance of the buyer relative to peers.”
