Get Ready for a Wave of Bank MergersDavid Henry
Banks have a problem. Loans outstanding have dropped 10 percent since October 2008, the sharpest contraction in more than 35 years, according to Goldman Sachs (GS). That's left them with unused lending capacity, idle cash, and depressed market values. As analysts at Keefe, Bruyette & Woods (KBW), Rochdale Securities, and CreditSights see it, those conditions make the industry ripe for a wave of takeovers that could rival the buying binge of 2001 to 2007.
This time, the four biggest banks won't be doing any significant buying. Bank of America (BAC), JPMorgan Chase, (JPM) and Wells Fargo (WFC) each controls something in the neighborhood of 10 percent of U.S. deposits, the most permitted by regulators when considering takeovers, and Citigroup (C) is trying to sell assets. The absence of those banks may keep prices down in any merger wave. And it leaves the field to regional banks such as U.S. Bancorp (USB) and PNC Financial Services Group (PNC). "Those companies have the luxury of looking at anything," says KBW analyst Christopher McGratty.
Acquirers are more likely to strike than they were last year now that the industry has stabilized. "If you feel you have a fair assessment of what your own assets are worth, you feel better about looking at others," McGratty says.
Many potential targets are attractively valued. The price-to-book-value ratio of the 24 companies in the KBW Bank Index is 0.9, down from an average of 2.1 from 1993 through 2006, according to Bloomberg data. The ratio is one of Wall Street's main gauges for bank shares.
Banks trading at large discounts include SunTrust (STI), Regions (RF), and Marshall & Ilsley (MI), according to Richard X. Bove, an analyst at Rochdale Securities in Lutz, Fla. 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. Spokesmen for Birmingham-based Regions, Alabama's biggest bank, and Marshall & Ilsley, based in Milwaukee, declined to comment.
U.S. Bancorp, PNC, BB&T (BBT), and People's United Financial (PBCT) have all made acquisitions, and their executives say they're hunting for more. Minneapolis-based U.S. Bancorp, ranked fifth by deposits, has acquired at least 10 banks since the credit crunch started and will continue to "opportunistically acquire," Chief Executive Officer Richard K. Davis said in a July conference call. PNC, now ranked sixth, 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," he said.
The pace of consolidation will quicken if the economy, loan demand, and interest rates fail to rebound. 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, says analyst David A. Hendler of CreditSights in New York. In that kind of environment, says Paul J. Miller, an analyst at FBR Capital Markets (FBCM) in Arlington, Va., "the only way you are going to grow assets is to buy another bank."
The bottom line: Conditions in the banking industry favor a new round of takeovers, though the largest players may be too big to participate.