NEW YORK, Feb 6 (Reuters) - U.S. regional banks are

capitalizing on improving investor sentiment by raising billions

of dollars in equity to pursue deals and beef up their balance

sheets.

Since Donald Trump's U.S. election victory in November,

banks have raised $1.7 billion through share sales, according to

LSEG data, close to the $1.8 billion raised during the previous

10 months of 2024. When turmoil spread through regional banks in

2023, lenders raised less than $850 million in equity during the

full year.

The volume of banks' equity raises increased after the

election, as investors became more optimistic that regulators

will allow more mergers and acquisitions in the banking

industry, said John Esposito, Morgan Stanley's ( MS ) global co-head of

financial institutions.

"Share prices improved due to the perception of improved

growth and an expectation of a more friendly regulatory

environment," he said. "Most banks desire to get bigger, and

there may be changes in the regulatory approval process and the

proposed capital rules" that would ease deals, he said. Esposito

expects M&A to be concentrated among mid-sized lenders,

particularly those with less than $50 billion in assets.

The merger of Banc of California ( BANC ) and PacWest in 2023

simultaneous with a capital raise was an early example of such a

deal. Other transactions supported by new capital include

acquisitions by Fulton Financial ( FULT ), UMB and Old National.

"The main drivers of bank capital raising right now are to

support an M&A transaction, a balance sheet restructuring, and

offensive capital for an economy that continues to steam ahead,"

said Tom Michaud, CEO of investment bank Keefe, Bruyette &

Woods.

Banks that hold securities or loans that are underwater have

also raised capital as a way to sell assets, recognize losses on

their portfolios and improve future earnings. While selling the

securities results in a short-term loss, the moves are aimed at

increasing future profits.

KeyCorp ( KEY ), Amerant Bancorp ( AMTB ) and Flushing Financial Corp ( FFIC ) are

among the companies that have tapped investors in capital

markets to shore up their balance sheets in recent months.

"Raising capital makes it easier for banks to absorb

embedded securities portfolio losses, and in some cases could

lead to more favorable regulatory review of deals," said Lee

Meyerson, chairman and founding partner of the financial

institutions practice at law firm Simpson Thacher & Bartlett.

Regional banks started to carry bigger paper losses on their

securities portfolios in the fourth quarter as 10-year Treasury

yields rose, said Megan Fox, a vice president on Moody's

Ratings' banking team. Average yields rose from 3.81% to 4.58%

in the quarter.

Two days after Trump was elected on Nov. 5, Valley Bank

sold $400 million of stock, helping to even out price moves.

"We were an outlier on certain balance sheet metrics,

including our commercial real estate (CRE) concentration, which

increased the volatility in our stock," Valley's interim CFO

Travis Lan told Reuters in an interview. Reducing its

concentration in CRE made the stock more stable, Lan said.

As the industry outlook improves, more small and mid-sized

lenders are likely to raise equity in transactions averaging

between $200 million and $400 million said Liz Jacobs, head of

banks and diversified financials at Morgan Stanley ( MS ).

"Investors are more supportive of mid-sized and regional

banks, due to the improved profitability outlook and potential

industry regulatory changes," she said.

Lenders should capitalize on the current strength of the

market to bolster their balance sheets, said a banker working on

several transactions for financial institutions who declined to

be identified discussing private negotiations.

"If I'm a bank's financial officer and did not discuss a

capital raise, I'm living under a rock," the banker said.