The U.S. finance sector in 2011 will stop stockpiling money and start spending it, and that will include non-bank acquisitions among Big 4 banks Bank of America, Citigroup, JPMorgan Chase and Wells Fargo, analysts for Keefe, Bruyette & Woods said at a Dec. 9 outlook breakfast.

Two years after the financial crisis, pent-up demand for consolidation will finally be unleashed with a shift to capital deployment and away from capital accumulation, according to the financial-services analysts on KBW’s North America Equity Research team.

Because the move toward global regulatory standardization has stalled, nations will become more inward focused—and for the United States, that means big financial institutions can deploy capital, especially now that the elections are past and a new Congress will take over in January.

Capital markets will be the strongest area for growth in 2011, in our opinion, while bank loan balances will be the greatest area of weakness,” the analysts wrote in 2011 outlook report. “Regulatory pressures on the industry will remain high with the implementation of the Dodd-Frank bill. However, onerous implementation of regulations will be constrained as a result of recent changes in Congress.”

A continuing negative, however, will be new loan demand, which is likely to stay tepid in 2011.

“Continued consumer deleveraging will likely result in slow growth in the U.S. in 2011,” the analysts predict. “Our forecast is that U.S. gross domestic product (GDP) will grow slightly less than 2% next year and the unemployment rate will fall to 9.1% by year-end 2011. We do not expect debt-to-income levels to stabilize before year end, with continued high savings rates extending into 2012.”

In their view, capital redeployment will focus on increased dividends, share repurchases, and mergers and acquisitions. Lending and growth opportunities for financials will be constrained, however, by the U.S. economic recovery’s slow pace.

“Too big to fail is going away,” asserted KBW Chief Equity Strategist Fred Cannon at the breakfast, adding that large banks such as Bank of America (BAC),

Citigroup (C), JPMorgan (JPM) and Wells Fargo (WFC) will look into buying non-banks. But, he conceded, depository acquisitions may be limited given continued fears that big banks might once again force a government bailout similar to the one that occurred in 2008.

“We believe non-bank acquisitions for these institutions may be considered, as we believe JPM may continue to invest in businesses such as investment banking, asset management and private banking on an international scale,” the KBW analysts wrote in a “Bank Takeover List” report.

However, the KBW analysts believe the next-largest banks in terms of assets offer interesting acquisition opportunities at favorable valuations. Specifically, they like BB&T Corp. (BBT), PNC Financial Services Group (PNC) and U.S. Bancorp (USB).

“We believe they are best-positioned to participate in open-bank consolidation and would also be interested in building additional scale in their fee-income businesses,” the KBW analysts wrote. “Collectively, these banks possess a strong capital base, have repaid TARP, enjoy good growth prospects, deliver above-average profitability, and have attractive valuations.”

KBW identified Marshall & Illsey (MI) as a potential takeover target in July, and on Dec. 17, Bank of Montreal agreed to buy Marshall & Illsey for more than $4 billion.

As for regional and community banks, “you’re very likely to see bigger banks buying smaller banks,” noted KBW Vice-Chairman and Chief Operating Officer Thomas Michaud at the breakfast.

KBW’s Bank Takeover List sees limited opportunities on the East Coast, though some institutions are poised to benefit from a return to open-bank, or friendly, consolidation. These include First Niagara, M&T Bank, Northwest Bancshares, Oceanfirst and People’s United. In the South, both open-bank and FDIC opportunities are greater, according to KBW’s analysts, who named 10 banks well positioned for mergers and acquisitions. They also identified eight M&A targets in the West.

See AdvisorOne's Outlook 2011 calendar to find the publishing dates for, and links to, other categories in the Outlook series.

Read a KBW Q3 2010 wrap-up of asset management firms’ performanceat AdvisorOne.com.