- Congress just rolled back key provisions of the Dodd-Frank Act, the major piece of legislation that aims to prevent another financial crisis.
- This could mean an opportunity for mergers and acquisitions within the regional banking space.
Congress just rolled back parts of the Dodd-Frank Act, and that could mean much more for regional banks than just the ability to make more loans.
On Monday, Congress voted to loosen up some banking provisions of Dodd-Frank, a major piece of legislation that aims to prevent another financial crisis.
Now there's a big opportunity within those banks for acquisitions and consolidation, and that could mean further share appreciations for the sub industry. The Spider S&P Regional Banking ETF is up 9.5% this year, far outpacing the S&P 500, which is only up less than 1%.
Before the rollback, any bank with $50 billion or more in assets was considered a systemically important financial institution (SIFI). Now, any bank that has less than $100 billion in assets is no longer considered systemically important. SIFI banks are subject to stringent Dodd-Frank regulations, whereas non-SIFI banks are free from those. With the increased minimum to become a SIFI, more regional banks will be able to consolidate without the fear of increased regulation.
"The group could see a pick up in consolidation," Evercore ISI analyst John Pancari told Business Insider. "Regulation has been getting in the way of them completing deals."
He gave the example that if a regional bank with $30 billion in assets wanted to buy a bank with $20 billion in assets before the rollback, the combined bank would then become a heavily regulated SIFI. Now, it would be $50 billion under the SIFI minimum.
Regional banks want to consolidate because "it's still a very competitive space," Pancari said. "The business models, to a degree, are in flux," he added. That's in part due to the big banks shifting to a more digital model, which requires big investment dollars.
John Toohey, head of equities at USAA, agrees.
"You'll see some more consolidation, which will be good for any bank, but also for the acquirers," he told Business Insider. "You can get to double digit earnings-per-share growth."
Toohey also tabs the need for regional banks to go digital as a big driver of M&A. "If you're going to keep generating strong earnings, you're going to have to get that from managing your expense base well, and probably reducing expenses means to the extent that you can, have a digital presence," he said. "There's some scale advantage with the bigger banks, which is why you might see some consolidation amongst the regional banks."
While no investor should ignore the performance potential of the big banks, regional banks might be a good play right now. "If you're looking across the stock market, financials and banks look interesting," Toohey said. But he emphasized the rollbacks "make the regional banks incrementally more attractive than the big banks."
As for which banks he likes, Toohey concludes, "you have to do your due diligence," but "this certainly increases the reward component for regional banks."