**Regional Banks Face Growing Pressure**
A trio of regional banks is facing increasing pressure on returns and profitability, making them potential targets for acquisition by larger rivals, according to analysts at Keefe, Bruyette & Woods (KBW).
### Tough Spot for Mid-Sized Banks
Christopher McGratty of KBW stated that banks with assets between $80 billion and $120 billion are facing low structural returns, which puts them in a difficult position. This group of banks has the lowest structural returns among banks with at least $10 billion in assets. As a result, these banks need to grow larger to help pay for coming regulations or risk struggling for years.
### Potential Targets for Acquisition
Analysts believe that of the eight banks in this asset range, Comerica, Zions, and First Horizon might ultimately be acquired by more profitable competitors. However, Western Alliance and Webster Financial, which have “earned the right to remain independent” with above-peer returns, could also consider selling themselves.
### Potential Acquirers
On the other hand, banks like East West Bank, Popular Bank, and New York Community Bank, each with higher returns, could end up as acquirers rather than targets. KBW estimated banks’ long-term returns, including the impact of coming regulations, to arrive at these conclusions.
### Regulatory Impact
Banking regulators have proposed a sweeping set of changes that will affect institutions with at least $100 billion in assets. This will increase their compliance and funding costs as a result of higher interest rates and deposit runs that triggered the collapse of three midsized banks this year.
### Banks Waiting for Clarity
Banks are waiting for clarity on regulations and interest rates before they pursue deals. However, consolidation has been a consistent theme for the industry as banks figure out the rules in the face of lines drawn around certain sizes of assets. “There’s still too many banks, and they can be more successful if they build scale,” McGratty said.
### Impact on the Sector
Shares of regional banks have dropped 21% this year, although they have climbed in recent weeks as concerns around inflation have abated. However, the sector remains weighed down by concerns over the impact of new rules, and the risk of a recession on loan losses, particularly in commercial real estate.
### Transformation of the Banking Landscape
Given the new rules, banks will eventually cluster in three groups to optimize their profitability: above $120 billion in assets, $50 to $80 billion in assets, and $20 to $50 billion in assets. Banks smaller than $10 billion in assets have advantages tied to debit card revenue, meaning that smaller institutions should grow to at least $20 billion in assets to offset their loss.
As the landscape of the banking sector undergoes a seismic shift, it remains to be seen how banks will adapt to the changing regulatory environment and how it will affect the industry moving forward.
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