Morgan Stanley: These 2 Banks Are Top M&A Candidates

A new Morgan Stanley report looks at the potential for an acceleration of merger and acquisition (M&A) activity among mid-cap banks in 2015. Analysts give several reasons why they believe a recent modest increase in M&A activity in the financial sector could pick up next year.

Many banks have benefited from cost-cutting measures and reserve releases over the past few years, but analysts believe that the window to continue to benefit is closing.

While most banks see bottom-line help coming from higher short-term interest rates, some liability-sensitive banks could be hurt by potential interest rate hikes.

Banks that have been shortsightedly buying long-duration assets to maximize earnings during the period of low rates could end up being bogged down by those long-term assets once rates start to climb.

Related Link: Bank Of America's Top 10 Stocks For 2015

Other banks have been betting on interest rate hikes happening much sooner than Morgan Stanley’s projections of early 2016. The earnings pressure these banks could feel if interest rates remain low throughout 2015 might lead them to consider M&A, analysts add.

The two biggest banking M&A deals announced in 2014 have been CIT Group Inc CIT's acquisition of OneWest’s $21.8 billion in assets, and BB&T Corp BBT's acquisition of Susquehanna Bancshares Inc SUSQ's $18.6 billion in assets.

In light of these potential M&A catalysts, Morgan Stanley analyst Ken Zerbe sees the recent pickup in announced M&A deals as the most important indication of what’s to come.

“This is vitally important, in our view, as it shows that bank managements are getting more comfortable with the likelihood that their announced deals will be approved.”

Morgan Stanley analysts believe that New York Community Bank NYCB and BankUnited Inc BKU are two of the most likely mid-cap banking M&A candidates in 2015.