That was the consensus of analysts participating in an American Banker roundtable this month in New York.
Economic uncertainty and stringent new accounting rules have the healthiest banks wary of buying weakened rivals, they said. Also, the heads of struggling institutions are still unrealistic about their prospects for survival — but that may be changing as bank failures accelerate.
"This is going to take some time to work through and I think we're somewhat at the tip of the iceberg here," said Joseph H. Moeller, a managing director in the investment banking group at KBW Inc.'s Keefe, Bruyette & Woods Inc. "As some of the weaker banks see the guy next door failing they'll capitulate."
Consolidation is inevitable because there are simply too many banks in this country, Moeller and two other industry experts said. And those that emerge from the recession in relatively good shape won't be nearly as profitable as they were before the economy tanked. To survive in the long term, they are going to have to buy other companies to increase deposits and boost margins by eliminating redundant locations and back-office functions, among other things.
"Our sense is that the pace of consolidation will accelerate from what we've seen. Over the last 20 years, the industry has gone from 16,000 banks down to 8,000 banks," said Mark Fitzgibbon, director of research at Sandler O'Neill & Partners LP. "We think the number will get cut in half again in the next five, so we'll go from 8,000 to 4,000 banks."More than 80 banks have failed this year, and there have been few mergers outside of federally assisted deals. Those transactions have put a chill on overall mergers and acquisitions, as bank management teams don't want to put their company on the auction block in a buyer's market.
But Fitzgibbon said potential buyers are also skittish about doing deals because they don't know how severe loan losses might get, particularly in commercial real estate. That market could be a huge source of pain as billions of dollars of CRE loans mature over the next three years, and ailing businesses don't have the money to repay or refinance.
Moeller said troubled loans are weighing down deal activity thanks to mark-to-market accounting rules that make it "difficult for a buyer to pull a transaction off."
That's because buyers have to value their potential targets' bad assets at today's dismal market rates, and show that they have the capital to support any losses.
"You take that hit day one and it blows a hole in your balance sheet," he said.
Mergers are "one of the things that can help cure the industry," but the industry's problems were preventing them from happening, Moeller said.
Still, that doesn't mean banks are just waiting around for M&A to rebound.
Frank Barkocy, managing director of research at Mendon Capital Advisors Corp., said a number of companies have been shoring up their capital and recruiting new people to be ready to take market share when things start getting better. Expect them to kick off the consolidation wave, he said. In the Northwest, he cited Columbia Banking System Inc. in Tacoma. In the Northeast, he said People's United Financial Inc. in Bridgeport, Conn., and Hudson City Bancorp. in Paramus, N.J., have the "strength of capital to make some attractive acquisitions as we move forward."
Still, Fitzgibbon said most companies were still too busy fixing their problems to focus on the future.
"I think as you look in other regions you will see lots of companies that are in very difficult straits, and it's very hard for the management teams to focus on the future when they are fixated on the present and dealing with massive loan issues," he said. "I think this is a major issue that faces the industry and I think it'll be some time before we get the pig through the python."
Barkocy said midtier banks don't have to wait to buy entire institutions to boost profits.
"A number of banks are lifting out personnel from mostly the larger banks that are having difficulties," he said. "They not only acquire talented people, but also a book of business that goes with that."
Moeller agreed.
"That's an interesting way to think about it as well," he said. "There's a sort of natural Darwinism that's taking place where the strong are getting stronger and the weak seem to be suffering."
Moeller said he expects traditional deal activity to start as a trickle, overlapping with assisted deals as more management teams surrender to the inevitable.
He said to expect companies that have gone out and raised "offensive capital" to be on the prowl for deals. He also cited Columbia, as well as Western Alliance Bancorp. in Las Vegas and First Niagara Financial Group Inc. in Buffalo. In July, First Niagara agreed to buy Harleysville National Corp. in Harleysville, Pa.
"There's a lot of companies out there right now that are trying to position themselves" to do deals, Moeller said.
Consolidation will take years, though it's not clear when this will start. Don't expect much to happen this year, Barkocy said.
"I think it's probably a longer-term process," he said. "It could start as early as late 2010, but more likely than not continue for a couple years thereafter."
Fitzgibbon said to look out for signs of "capitulation," like banks selling loans at fire-sale prices, or new management teams showing a willingness to mark down loans.
"Consolidation may begin to pick up as we get further along in the process and acquiring institutions start to get more comfortable with the assets they're acquiring," Fitzgibbon said. "But I think the FDIC will be mopping things up until 2011."
As the recession wanes, the three agreed, the government should steer clear of implementing legislation that will unfairly penalize the finance industry. Fitzgibbon suggested that government officials brainstorm with "the brightest minds in the banking" industry to craft sensible regulation. "But I'm not sure that will happen," he said.
Barkocy said politicians should place the health of the economy ahead of their political ambitions.
"What we need is a fair playing field. Common sense has to prevail. We don't have that today," he said.
For more stories like this, go to American Banker.
By Matt Monks, American Banker
No comments:
Post a Comment