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NEW YORK, Oct 20 (Reuters) - Jitters around U.S. banks' exposure to loan losses have fueled expectations for more mergers and acquisitions as big buyers may be spurred to look to absorb smaller or weaker rivals, according to four senior industry sources. Sign up here. "Stock market activity and valuations have always driven M&A conversations, so it is possible that the current market movements could speed up those conversations," said Dan Hartman, a lawyer at Nutter, adding banks were already open to M&A because of the Trump administration's friendlier stance toward deals. "The bigger the banks get, the better prepared they can be in a situation to absorb significant credit losses." Still, there are key differences between worries now and the 2023 regional crisis, a senior industry executive who declined to be identified said, adding that concerns about credit quality are exacerbated because information on banks' loan exposure is typically kept private. While securities mismatches that led to the 2023 bank failures were visible to shareholders, credit losses are aggregated and only disclosed to bank shareholders if they reach a certain material threshold. The concerns over credit will make buyers more cautious as they pursue deals, according to the industry executive. The industry executive and a second industry source said that any growing concerns about smaller banks could promote M&A activity. The executive did not mention any specific bank as a target but said bank boards grow worried when they see prolonged bouts of weakness, and are more likely to press management to consider a sale, the executive said. Still, the higher risk of taking on banks which could have problems would give some buyers pause, two of the sources said. Another industry source said bank executives have been discussing M&As as the regulatory landscape improves for deal-making, based on interactions with various banks. The source did not name specific banks. A broader positive economic environment in recent months has also made it easier for institutions to decide it is time to sell, another industry source said. POTENTIAL TARGETS Bank deals have risen, with the 51 announced bank deals in the third quarter, the highest three-month total in four years, according to data provider S&P Global Intelligence. Still, stock price volatility is generally considered bad for dealmaking, as it makes it harder to agree on a valuation. Early-stage M&A considerations may be paused until the broader market calms in coming days and weeks. The uncertainty, though, emphasizes the importance of scale in helping absorb market and credit shocks, supporting the longer-term prognosis for deals, according to an industry banker. For smaller banks, credit trouble could prompt boards or shareholders to pressure them to sell to midsize lenders. For the most part, bank loans have been performing better than expected, said Michael Driscoll, Credit Rating Officer, Global Financial Institutions Ratings at Morningstar DBRS. "Losses have been low, so these recent numerous larger loan problems have raised fears of a broader deterioration," Driscoll said. "But one of the lessons from 2023 regional bank failures was that banks' funding can unravel faster than in the past if sizable issues emerge." Greg Hertrich, the head of U.S. rates strategy at Nomura, said the latest selloff would revive strategic deal talks, instead of tempting any new buyers or sellers to emerge. "If there are changes in the market's view of the enterprise value of these franchises, then that could accelerate timetables," he added. Reporting by Nupur Anand, Lananh Nguyen and Saeed Azhar in New York, additional reporting from Chris Prentice, David French and Manya Saini, editing by Megan Davies and Diane Craft Our Standards: The Thomson Reuters Trust Principles., opens new tab Nupur Anand is a U.S. banking correspondent at Reuters in New York. She focuses on JPMorgan Chase, Wells Fargo and regional banks. Anand covered banking and finance in India for more than a decade, chronicling the collapse of major lenders and turmoil at digital banks and cryptocurrencies. She has a degree in English literature from Delhi University and a postgraduate diploma in journalism from the Indian Institute of Journalism & New Media in Bangalore. Anand is also an award-winning fiction writer. Lananh Nguyen is the U.S. finance editor at Reuters in New York, leading coverage of U.S. banks. She joined Reuters in 2022 after reporting on Wall Street at The New York Times. Lananh spent more than a decade at Bloomberg News in New York and London, where she wrote extensively about banking and financial markets, and she previously worked at Dow Jones Newswires/The Wall Street Journal. Lananh holds a B.A. in political science from Tufts University and an M.Sc. in finance and economic policy from the University of London. Saeed Azhar is a Reuters financial journalist and part of the U.S. banking team, which covers Wall Street's biggest banks. He focuses on Goldman Sachs and Bank of America, and also writes about regional banks. Before moving to New York in July 2022, he led the finance team in the Middle East from Dubai, and also worked in Singapore, covering Southeast Asia finance.
