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The Deal: Banks Return to M&A

Tickers in this article: BAC BMO C COF JPM MTU PACW
By Jane Searle

NEW YORK (TheStreet) -- Deal activity in the American banking sector is at its highest level in nearly three years, a stark contrast to the global scene, where sector M&A has hit lows not seen since the credit crisis.

For the year to date, there have been 274 bank deals in the U.S., a lift on the prior two years and on par with deal numbers for 2010, according to Dealogic. Globally, bank M&A, at 704 deals for the year to date, is at its lowest level since 2008, when 694 deals were struck.

A stricter regulatory and sluggish economic backdrop has challenged all banks, though U.S. institutions overhauled balance sheets and purged themselves of toxic assets more quickly than their European peers.

"A lot of U.S. banks have seen their stock rise, which gives them a strong currency to buy things when it's a challenging environment to grow revenue and get earnings per share growth," Keefe, Bruyette & Woods associate, Nishil Patel, said. He added that between $5 billion and $10 billion was the "sweet spot" for domestic bank M&A. If banks exceed this size through acquisition, they lose the ability to use Trust Preferred Securities as Tier 1 capital.

While the number of U.S. deals is up, total deal value at $10.38 billion is at its lowest point in nearly three years, as regulation makes it difficult to strike large deals. Banks also face more punitive capital and regulatory hurdles if they exceed certain size thresholds, prompting them to carefully weigh the merits of a deal.

The largest U.S. bank deal for the year to date is PacWest Bancorp's $2.36 billion acquisition of CapitalSource, in July, highlighting the concentration of activity at the mid-tier asset level. Both 2010 and 2011 saw strategic deals top the list: Capital One Financial's $8.9 billion purchase of ING Direct USA led in 2011; while Bank of Montreal scooped up Marshall & Ilsley for $4.3 billion in 2010.

Deal values during the credit crisis were skewed by transformative survival deals such as Bank of America's $18.5 billion acquisition of Merrill Lynch.