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Community Banks Turn to Mergers for Profit Boost

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Community banks are exploring the option of mergers to enhance their returns, as they seek strategies to expand profits in the upcoming years, according to a study conducted by S&P Bank Outlook. Although the merger activity of banks has been disappointing thus far, challenges to future profit growth may drive an upswing in acquisition activity by 2023 and 2024, report S&P analysts Zain Tariq and Nathan Stovall.

Shifts in the competitive landscape have led several institutions to increase their liquidity through higher-cost funding deposits, such as brokered deposits, borrowings from the Federal Home Loan Banks, and certificates of deposits (CDs). The study, which was released on Tuesday, underscores these changes, stating that banks are responding to the fight for deposits by bolstering liquidity.

Net interest margins pose another obstacle for banks, as they grapple with shrinking profits from loan payments coupled with the interest they must pay for deposits. In 2023, the KBW Nasdaq Bank Index BKX and the SPDR S&P Regional Banking ETF KRE have both faced declines of 12.3% and 18% respectively. In contrast, the Nasdaq COMP has experienced a formidable surge of 36.5%, while the S&P 500 SPX has advanced by 19.2% year-to-date.

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