NEW YORK (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.