Earnings Pressures May Spur Us Bank Mergers

A need by banks to address weak earnings could result in increased merger activity in 2016, according to Fitch Ratings.

Persistently low interest rates, high regulatory and compliance costs, and the need to invest in new technology is pressuring earnings on US banks, according to Fitch. Banks with large energy portfolios in particular will see material increases in related loan-loss provisioning.

“We believe there is heightened appetite for consolidation,” Fitch says. “This is especially the case among large regional banks, mid-tier players and smaller lenders.”

Fitch expects bank M&A activity to be primarily motivated by cost savings, but it says that depressed stock prices may prevent some deals from going ahead.

The average return on equity across the banking industry in the fourth quarter of 2015 was 9%, compared with nearly 13% in the first quarter of 2006, it says.

“We do not think interest rate hikes will provide much uplift to overall bank earnings in 2016, as the operating environment remains challenging,” Fitch says.