U.S. regional banks are leveraging the positive investor sentiment by raising billions of dollars in equity to pursue opportunities and strengthen their financial positions.
Following Donald Trump's election victory in November, banks have raised $1.7 billion through share sales, nearly matching the total amount raised in the preceding 10 months of 2024. In 2023, during a period of turmoil, banks raised less than $850 million in equity throughout the year.
The surge in equity raises post-election is attributed to increased investor optimism regarding potential regulatory changes that could facilitate more mergers and acquisitions in the banking sector, explained John Esposito, Morgan Stanley's global co-head of financial institutions.
Esposito highlighted the positive impact of improved share prices, driven by expectations of growth and a more favorable regulatory environment for banks seeking expansion and operational adjustments. He foresees a focus on M&A activities among mid-sized banks, particularly those with assets under $50 billion.
The joint capital raise by Banc of California and PacWest in 2023 set an early precedent for such deals, along with other transactions supported by fresh capital injections.
Tom Michaud, CEO of investment bank Keefe, Bruyette & Woods, emphasized that bank capital raising aims to facilitate M&A transactions, balance sheet restructuring, and strategic capital allocation amidst a flourishing economy.
Banks managing underwater securities or loans have also sought to raise capital to optimize their portfolios and enhance future earnings, even if it involves short-term losses when liquidating assets.
KeyCorp, Amerant Bancorp, and Flushing Financial Corp are among the firms that recently tapped into capital markets to fortify their financial positions.
In response to market dynamics and evolving regulatory frameworks, regional banks have been adjusting their strategies to mitigate risks and adapt to changing economic conditions. Industry experts anticipate a trend of increased equity raising by small and mid-sized lenders to enhance their resilience and capitalize on growth opportunities.
As industry conditions continue to enhance, it is advised that banks take advantage of the current market strength to reinforce their balance sheets, suggested an industry insider involved in financial institutions' transactions, who preferred to remain anonymous in discussing confidential matters.