Activist investor sees M&A boom, wind at the back of bank stocks

"Street Talk" is a podcast hosted by S&P Global Market Intelligence that takes a deep dive into issues facing financial institutions and the investment community.

Listen on Apple Podcasts and Spotify.

Activist investor John Palmer sees plenty of catalysts for bank stocks, including stronger fundamentals, attractive valuations and a resurgence in M&A activity among regional and community banks.

In the latest Street Talk podcast, Palmer, principal and managing member at PL Capital Advisors LLC, discussed his firm’s investment approach, its successful history in running proxy campaigns and how its interactions with bank management teams have changed over time. The veteran investor also shared how PL Capital has encouraged change and offered value to management teams as well as his view on the need for scale at some banks, M&A activity, regulation and bank valuations.

Palmer pointed to a number of catalysts for valuations. He noted that banks are reporting stronger loan pipelines, which should manifest into stronger loan growth. He also said that M&A discussions have picked up and people are getting "off the beach and having conversations to actually getting in the water."

"I think you're going to see a boom in M&A," Palmer said. "You're seeing their stock prices start to go up, too, which gives them a better currency to allow them to go down market and to buy too."

He noted that banks previously were only allowed to pursue one deal at a time, but believes that should and will change under the new administration. For instance, Palmer noted that Wintrust Financial Corp., which has a history of acquiring small banks, would have been prohibited from pursuing multiple purchases of banks as small as $500 million to $1 billion in assets at the same time even though the company has more than $60 billion in assets.

Palmer expects "a lot more deals," including among larger regional banks and noted that there has been a rumor that Comerica Inc. could be in play. He noted that banks were previously worried about growing above the $100 billion asset threshold but believes that concern will fade.

A rebound in deal activity could bring back acquisition premiums into the small banks. Smaller banks have traded at much lower valuations than larger banks and a rebound in M&A activity could reduce that disparity. Palmer further noted that banks are trading at a much greater discount to the broader market than they have historically. He said that history shows that valuations tend to reverse course over time and lead to sustained, strong performance for bank stocks.

"You tend to have a crisis and you'll have a two-, three-year period of negative returns on stock prices in the banking industry. And then that's followed by a six- to eight-year upward movement in stock valuation," Palmer said. "We think there's a runway here for another six to seven years of upward movement in stock prices."

While Palmer sees a number of catalysts for bank stocks, he noted that PL Capital first looks for franchise value when investing in an institution. He said PL Capital typically targets companies with assets between $1 billion and $10 billion, where valuations are often lower, creating opportunities for improvement and growth.

Palmer said the firm has a timeline for each investment between three and five years and seeks gradual improvement at a company rather than rapid transformations. He said if a bank is earning a lower return on equity, then it needs to improve earnings and probably ultimately needs to sell.

"We don't go and expect you to go from 5% to 15% in 6 months. It's not possible. And if you do, you're going to break something, and that's not going to end well for anybody," he said.

PL Capital has invested in other franchises like Evans Bancorp Inc., which have produced strong returns on equity on a stand-alone basis. In that case, Palmer said the firm did not feel the need to get on the board because its philosophy was aligned with senior management. Evans ultimately agreed to sell to NBT Bancorp Inc. in September 2024 at a significant premium to market price three months before the deal was announced.

Palmer said PL Capital has run close to 25 proxy campaigns in history and has won all but one of them. That success has caused interactions with management teams to evolve from confrontational proxy contests to collaborative discussions on improving company performance.

"When we show up at a company now, management realizes that if we're there, we're serious," he said.