US banks taking advantage of higher valuations by raising capital

Common equity issuance by US banks has picked up in the first few weeks of the fourth quarter and is approaching the total amount raised in the third quarter, which was the highest in three years.

About halfway through the fourth quarter, US banks have raised $1.43 billion through common equity offerings, according to S&P Global Market Intelligence data through Nov. 18. In the third quarter, US bank common equity issuance reached $1.72 billion, which was the highest quarterly total since the third quarter of 2021, when $5.99 billion was raised.

Some banks have been issuing stock to help fund initiatives related to M&A, better position their balance sheets, or just to give themselves greater optionality as the new year approaches. Equity research analysts expect more banks to raise capital to take advantage of valuations that have built on their 2024 gains after the US election.

"I think you're going to see some banks raise capital for transactions. I think some banks are going to raise capital proactively for growth or they basically found themselves a little tighter than they expected from a capital perspective," Hovde Group analyst Brett Rabatin said in an interview with Market Intelligence. "It seems like a lot of banks want to go into [2025] with healthy capital levels just so they can have optionality with potential things in the coming year."

Recent capital raises

Since the results of the presidential election fueled a jump in bank stocks earlier in November, four banks have closed common stock offerings. Two of them — Associated Banc-Corp and Dime Community Bancshares Inc. — are planning to apply the proceeds toward balance sheet optimization strategies, among other uses.

Analysts had different thoughts on how Associated Banc-Corp could utilize the proceeds from its $345.0 million offering, with one saying a balance sheet restructuring is unlikely given the company's sizable restructuring in late 2023, and another saying further securities repositioning is possible.

Hovde Group's Rabatin believes most of the banks that wanted to restructure their balance sheet from a securities perspective have done it already, though there may be more banks considering restructurings.

"Banks look at it every week and look at the payback periods. I think a lot of the ones that have made sense to do have been done, [but] we've certainly seen some volatile rates here so I'm not saying that there won't be more of them," Rabatin said.

In the case of Dime Community's $143.7 million offering and Valley National Bancorp's $460.0 million offering, several analysts pointed out that the offerings will help reduce the companies' commercial real estate concentrations. The still-uncertain commercial real estate outlook could drive more banks to consider capital raises, Rabatin said.

"I think in some markets, there's still some office and other related properties to work through," the Hovde Group analyst said. "You're going to see some banks raise capital just to bolster their ratios to appease the regulators that they're not going to have any issues if they decide to move on from a bucket of commercial real estate and try and transact it."

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The fourth quarter so far has seen the continuation of banks using capital raises to supplement M&A. Mid Penn Bancorp Inc. and Atlantic Union Bankshares Corp. both completed capital raises after announcing their respective deals to acquire William Penn Bancorp. and Sandy Spring Bancorp Inc.

Additional capital raises in the bank space will be mostly related to M&A as deal math continues to be challenging and banks desire timely deal approval, Rabatin said.

"Banks are looking at deals and wanting to illustrate a strong capital base pro forma with the transaction to hopefully get the deal approved on a timely basis," Rabatin said. "I do think you'll see capital raises based on that alone."