In a banking industry report released today, financial research firm Sterne Agee highlight a pickup in M&A activity in the banking sector in the first quarter of 2014, and argues this strong start augurs for more and bigger deals yet to come in the next few quarters. Sterne Agee analysts Brett Rabatin et al. also updated their list of “select consolidators”, firms they believe “will benefit from the ‘hitch the wagon’ strategy undertaken by struggling banks.”

Banks M&A Activity

28 whole-bank deals in Q1 2014

Rabatin and colleagues argue that a number of factors are converging that all point to more M&A in the banking sector in the relatively near future. “The M&A market is gradually warming up, as 28 whole-bank deals (>$5 million value) have been announced compared to 24 in 1Q13 and 22 in 1Q12. From a pricing standpoint, the median P/TBV multiple has increased to 1.60x this year vs. 1.29x in all of 2013 and 1.20x in 2012. Also noteworthy, core deposit premiums have increased to 7.2% in 2014 vs. 3.6% in 2013 and 2.7% in 2012. Given the lift in M&A valuations, we believe M&A activity should gain momentum, particularly among smaller institutions, as boards seek to solve a combination of capital, regulatory, profitability, and management issues in the lackluster environment that seems likely to persist.”

More small bank M&A activity

The Sterne Agee analysts also point out that the macroeconomic environment is making many small banks more attractive, and this will likely prove a catalyst for more small bank M&A activity. “In our view, this trend largely reflects a shift in market sentiment towards proven consolidators that will likely be successful in future M&A due to one or a combination of the following: (1) premium currency; (2) favorable position as partners of choice in less competitive M&A markets; and (3) the potential to leverage an existing cost structure. Buyers with one or more of these attributes, coupled with the fatigue from sub-par profitability and/or capital constraints that exist as smaller banks, should drive a steady increase in deal flow over the next few years, in our opinion.”

Banks M&A Deals

Companies likely to benefit from increased M&A activity

The report also offered a list of financial institutions that Sterne Agee to “benefit from increased M&A activity within each of their respective markets.” Buy-rated stocks included Ameris Bancorp (NASDAQ:ABCB), Berkshire Hills Bancorp, Inc. (NYSE:BHLB), Financial Institutions, Inc. (NASDAQ:FISI), Hilltop Holdings Inc. (NYSE:HTH), First Financial Holdings, Inc. (NASDAQ:SCBT) and Umpqua Holdings Corp (NASDAQ:UMPQ). Neutral-rated stocks include Bank Of The Ozarks Inc (NASDAQ:OZRK), City Holding Company (NASDAQ:CHCO), IBERIABANK Corporation (NASDAQ:IBKC), Home Bancshares Inc (NASDAQ:HOMB), United Bankshares, Inc. (NASDAQ:UBSI), Western Alliance Bancorporation (NYSE:WAL) and Prosperity Bancshares, Inc. (NYSE:PB).

It should be noted that these are not companies that SA expects to be acquired, but rather the “select consolidators” who stand to gain the most from thoughtful, focused acquisitions. The SA analysts suggest the best investment strategy is “to own a basket of select consolidators that will experience out-sized growth from M&A.”