U.S. Bancorp and PNC Financial Services Group Inc. may lead the biggest boom in bank takeovers since 2007, and this time, the largest lenders can only sit and watch.
Bank loans outstanding have dropped 10 percent since October 2008, the deepest contraction in more than 35 years, according to Goldman Sachs Group Inc. That’s left banks with unused lending capacity, idle cash and depressed market values, making laggards ripe for consolidation, according to KBW Inc., Rochdale Securities LLC and CreditSights Inc. Potential targets include KeyCorp, SunTrust Banks Inc. and Regions Financial Corp.
Buyers probably won’t have to bid against the four biggest U.S. lenders, keeping a lid on prices. Bank of America Corp., JPMorgan Chase & Co. and Wells Fargo & Co. each controls about 10 percent or more of U.S. deposits, the most permitted by regulators when considering takeovers, and Citigroup Inc. is trying to sell assets. Their absence leaves the field to the biggest regional banks such as U.S. Bancorp and PNC.
“Those companies have the luxury of looking at anything,” said KBW analyst Christopher McGratty in New York. Acquirers are more likely to strike than they were last year now that the industry has stabilized, he said. “If you feel you have a fair assessment of what your own assets are worth, you feel better about looking at others.”
Executives at Minneapolis-based U.S. Bancorp, Pittsburgh-based PNC, BB&T Corp. and People’s United Financial Inc. have all made acquisitions and say they’re hunting for more. U.S. Bancorp, ranked fifth by deposits among commercial banks, acquired at least 10 banks since the credit crunch started, while PNC is sixth after buying National City Corp.
The catalyst for deals could be announcements in November of minimums for capital and liquidity from international regulators meeting in the Basel Committee on Banking Supervision, according to Richard Bove, analyst at Rochdale Securities in Lutz, Florida. Banks that can’t meet the thresholds may become targets, and acquirers will know how much capital deals will require, Bove said.
The price-to-book ratio for the 24 companies in the KBW Bank Index is 0.9, down from an average of 2.1 times from 1993 through 2006, according to Bloomberg data. The ratio, comparing the stock price to the theoretical amount shareholders would own if liabilities were subtracted from assets, is one of Wall Street’s main gauges for bank shares. A lower figure could make a bank vulnerable.
Banks trading at large discounts include SunTrust, Regions and Marshall & Ilsley Corp., Bove said. Atlanta-based SunTrust trades at about 0.7 times book value, Regions at 0.6 and Marshall & Ilsley at 0.7, according to Bloomberg data. Regions, Alabama’s biggest bank, is based in Birmingham. Marshall & Ilsley is based in Milwaukee.
KBW, which specializes in banks, named 38 potential buyers, 26 possible sellers and 11 buyers that could become sellers. Targets include Boston Private Financial Holdings Inc. of Boston, Susquehanna Bancshares Inc. of Lititz, Pennsylvania, and Wilmington Trust Corp. of Wilmington, Delaware.
Takeover valuations will be one-third lower than during the last merger binge of 2000 to 2007, according to KBW. Prices will be about 15 times long-term annual earnings and 1.5 times tangible book value, KBW said.
Spokesmen for banks named as targets declined to comment or didn’t respond to inquiries.
U.S. Bancorp will continue to “opportunistically acquire,” Chief Executive Officer Richard K. Davis said in a July conference call. Recent weakness in the economy could make other banks more interested in selling, Davis said.
PNC finished integrating National City branches and accounts in June, six months ahead of plan, CEO James E. Rohr said in a July conference call. PNC’s confidence that it can digest another bank “is higher than it has ever been,” Rohr said.
JPMorgan’s focus is on growing without acquisitions, said Thomas Kelly, a bank spokesman. Bank of America’s Scott Silvestri referred to repeated comments by CEO Brian T. Moynihan that the Charlotte, North Carolina-based company won’t pursue acquisitions. Mark Costiglio, a spokesman for New York-based Citigroup, and Mary Eshet, at San Francisco-based Wells Fargo, declined to comment.
While the biggest banks are sidelined, competition may emerge from Canada and Europe. Banco Santander SA has been stalking Buffalo-based M&T Bank Corp., according to the Financial Times, while Bank of Montreal and Royal Bank of Canada said they may expand in the U.S.
Takeovers will start with smaller banks, said Paul J. Miller, an analyst at FBR Capital Markets Corp. in Arlington, Virginia, and a former examiner for the Philadelphia Federal Reserve Bank.
Examples include First Niagara Financial Corp.’s $1.5 billion offer in August for NewAlliance Bancshares Inc., Miller said. The biggest takeover of an open U.S. commercial bank since 2008 will lift Buffalo-based First Niagara into the ranks of the nation’s 25 biggest lenders, according to the company. Both First Niagara and NewAlliance, based in New Haven, Connecticut, were on KBW’s list of buyers.
The pace of consolidation will quicken if the economy, loan demand, and interest rates fail to rebound, analysts said. When borrowers repay loans, banks have nowhere to put the cash except lower-yielding securities.
“That pressure is going to continue to mount into 2011,” and push banks into deals, said analyst David Hendler of CreditSights in New York.
Bank loans in the U.S. fell $869 billion to $8.24 trillion from October 2008 through early August, according to Goldman Sachs. The decline is more than twice the 4 percent slide in 2001. At U.S. Bancorp, average loans grew in the second quarter by 4 percent annually. Without acquisitions, they would have dropped 2.7 percent.
In that kind of environment, where demand for what banks do is sinking, “the only way you are going to grow assets is to buy another bank,” Miller said.