Smaller banks will be under pressure to merge as competition for deposits heats up: S&P

Community banks will increasingly consider mergers to boost returns as they look for ways to grow profits in coming years, according to an S&P bank outlook study. While bank activity in mergers has been “abysmal” challenges to future profit expansion may lead to more acquisition activity in 2023 and 2024, said S&P analysts Zain Tariq and Nathan Stovall. “The competitive landscape has changed, with many institutions responding to the fight for deposits by bolstering liquidity with higher-cost funding deposits like brokered deposits, borrowings from the Federal Home Loan Banks and certificates of deposits (CDs),” said the study, which was released late Tuesday. Banks also face headwinds on their net interest margins, which is the profit from loan payments minus the interest they pay for deposits. The KBW Nasdaq Bank Index
BKX,
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is down 12.3% in 2023 and the SPDR S&P Regional Banking ETF
KRE,
-1.07%
is down 18% so far this year, compared to a 36.5% increase by the Nasdaq
COMP,
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and a 19.2% advance by the S&P 500
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