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Is the U.S. banking sector on the brink of consolidation?

The skyline of New York's Lower Manhattan area, Oct. 1, 2012.

Gary Hershorn/Reuters

In a little less than 30 years, the number of banks south of the border has fallen by half to roughly 6,300, with 450 of those publicly traded. But the next three years alone could reduce the number of publicly-traded lenders in the U.S. by a quarter.

That's the view of Robert Wessel, managing partner at Hamilton Capital Partners, who believes there will be a healthy increase in mergers and acquisitions in the coming months that will lead to 100 primarily small– and mid-cap banks consolidating.

Some speculators called for an increase in U.S. bank mergers over a year ago, but a recent note by Mr. Wessel outlines several key reasons why it's 2013, and not 2012, that will be the year of U.S. bank consolidation.

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One of the most compelling is that the profitability of this group of publicly traded banks has improved significantly, and net income figures are now equal to those posted before the financial crisis in 2006. This is critical, writes Mr. Wessel, because it empowers purchasers by improving their ability to judge the loan portfolio losses of a perspective buy.

There's also the depletion of banks available through the U.S. Federal Deposit Insurance Corporation – the independent government agency that acts as a regulator, deposit insurer and sometimes receiver for failed banks. There are now fewer cheap banks for sale through the FDIC, and there are fewer banks failing. And this pattern mirrors that of the late 1980s where "activity literally exploded once FDIC failures were exhausted, with deal activity eventually peaking over $250-billion in 1998," Mr. Wessel writes.

Finally, Mr. Wessel argues we've already observed the beginnings of the new buying cycle. The year 2012 ushered in some M&A among a number of solid U.S. banks (such as Pacific Capital Bancorp and Citizens Republic Bancorp, which were swallowed up in deals worth more than $1-billion.)

If M&A in the U.S. banking sector accelerates the way Mr. Wessel anticipates, it could be a good few years for those who say the U.S. has too many banks.

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