Credit Insights is out with a research report claiming that bank M&A could pick up as the health of the banking sector improves. CreditSights says:
“There is an obvious acquisition advantage goes for those banks which no longer have TARP funding”
Potential acquirers are: JPMorgan Chase,U.S. Bancorp, and BB&T, Morgan Stanley and Goldman Sachs.
Potential targets include: SunTrust, Regions, Fifth Third, Key, Comerica, M&I, Huntington, First Horizon, Zions, and Synovus.
“In general, we view the more “critical mass” regional bank franchises such as SunTrust, Regions, and Fifth Third as being more attractive than smaller targets, despite their identified capital need and well-known credit quality issues.”
The Wall Street Journal, however, believes many of these firms could be bogged down for years by their massive commercial real estate holdings. Specifically:
Commercial real estate is going to be a drawn-out problem for banks. How do investors sniff out which lenders are most exposed?
One possible first step is to compare the amount of commercial-real-estate exposure at a bank with its tangible common equity. Citigroup analysts recently did this, coming up with a list showing high numbers for certain regional banks. Zions Bancorporation’s commercial real estate was equivalent to just over 650% of its TCE in the first quarter, according to Citi. It was more than 580% at Huntington Bancshares.
However, the stocks of both banks already reflect considerable fears about their loan portfolios. They are both down more than 40% year to date, while both trade well below book value.
M&T Bank, of Buffalo, N.Y., has commercial real estate that is equivalent to more than 600% of TCE. Yet its stock has held up well this year.
It trades above 1.8 times tangible book and, unlike many peers, it has continues to pay a hefty dividend.
One of the reasons M&T has retained favor is the belief that it underwrote relatively conservative loans during the boom. Many believe the bank’s reserves are sufficient for any losses on its $18.8 billion commercial-property book, which contains significant exposure to the New York metro area.
But the bank doesn’t break out reserve coverage for commercial real estate. What’s more, in 2007, M&T made a $300 million investment in a commercial-real-estate entity called Bayview Lending Group, which is generating losses for the bank. The timing of the investment, near the top of the market, suggests M&T also was capable of getting carried away.
I believe it’s unlikely that any sort of M&A surge will occur for quite some time in the banking sector. Despite what the government and first quarter earnings tell us it’s quite clear that banks are still hoarding cash. Vast credit improvement is certainly helping the banking sector, but consumer lending is still very weak and showing no signs of a pick-up. Banks are sitting on record amounts of freshly minted government paper, but as the commercial real estate market implodes, credit card delinquencies rise, asset backed commercial paper market collapses, treasury yields surge and lending standards jump the banks are having a hard time finding suitable uses for their cash besides fighting for their own survival. The banking sector is still far from healthy enough to go on spending sprees.
Sources: Credit Sights & WSJ
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.