OREANDA-NEWS. US banks could see increased M&A activity in 2016 as they address earnings challenges, says Fitch Ratings. We expect bank M&A to be primarily motivated by cost savings but depressed stock prices may prevent some deals going ahead. Although some banks might prioritise share repurchase schemes over M&A given weak prices, we believe there is heightened appetite for consolidation. This is especially the case among large regional banks, mid-tier players and smaller lenders.

Results reported by US banks in 4Q15 were lower than in previous quarters, and key performance metrics showed a declining trend. Large regionals are outperforming their smaller peers, although we expect to see increased shareholder pressure across the industry to address lacklustre returns, which are still well below pre-crisis levels. The average ROE across the banking industry in 4Q15 was 9%, compared with nearly 13% in 1Q06.

Earnings are expected to remain relatively weak in the near term, reflecting persistent low interest rates, high regulatory and compliance costs, and the need to invest in new technology. Banks with large energy portfolios will also see material increases in related loan-loss provisioning.

Statements made during bank earnings' calls in mid-January indicated that most banks were expecting the US Fed to increase interest rates in summer 2016 and again towards the end of the year. Since then, volatile markets have raised uncertainty about further rate moves in 2016. Even so, we do not think interest rate hikes will provide much uplift to overall bank earnings in 2016 as the operating environment remains challenging. M&A could lead to cost savings, which could support earnings.

We assess the rating implications of bank M&A transactions in the same way we review other credit events. Fitch affirmed Huntington Bancshares' ratings in January 2016 following its announcement to acquire First Merit. This reflected our view that the transaction represents low credit risk, manageable integration and reasonable cost savings estimates. Conversely, we revised KeyCorp's rating outlook to Negative from Stable following the deal struck with First Niagara to reflect our view that integration and execution risks are high.

Other significant recent deals include New York Community Bancorp's acquisition of Astoria Financial and several BB&T deals. Prior to these, sizeable bank M&A deals were limited in the past few years. Regulatory hurdles continue to increase, and M&T's experience is likely to have contributed to some hesitancy among big banks. After a three-year delay due to Bank Secrecy Act/anti-money laundering concerns at M&T, the bank finally received regulatory approval, and closed its acquisition of Hudson City in November 2015.

Fitch views valuations on recent bank transactions as reflecting the uncertainty about trading and still high expectations on the part of sellers. Some of the higher multiples reflect the strength of the acquired banks' franchises, which have minimal credit issues.