Thanks to Federal regulations, 53 California banks will be forced to close or merge with “banks that can not fail”—the biggies that lobby Congress to protect them.
Now the biggest banks will get bigger, with the taxpayers bailing them out if needed. Small local banks, without high priced Gucci shoed lobbyists, go away. Oh, the Feds have decided that some banks MUST buy others.
“Mustafa says California has 53 banks that must or should sell and 137 that must or should buy another bank, which means there’s 2.6 potential buyers for every potential seller, compared to a ratio of 1.9 nationwide. In Northern California, which includes San Francisco, Oakland, San Jose, Sacramento and Fresno, there are 58 potential buyers and 26 potential sellers, creating a ratio of 2.2 to 1.”
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San Francisco Business Times by Mark Calvey, 12/18/12
California may be one of the nation’s few sellers’ markets for community banks over the next few years, according to Kamal Mustafa, CEO of Invictus Consulting Group.
The New York firm, which conducts stress tests on banks based on the quarterly data provided to regulators, says that the need for capital by weak banks nationwide exceeds the amount of capital held by stronger banks, a situation not seen since the Great Depression. In other words, some of the weak banks will eventually be closed by regulators, Mustafa says.
Mustafa, former head of Citibank’s (NYSE: C) M&A practice, declined to publicly identify banks landing on his list of those having to sell. But he captured the state of M&A he sees ahead for community banks in his report titled “Buyers and Bleeders.”
“While M&A transaction volume has been muted to date, we believe that an increase in activity in a buyers’ market is in development,” Invictus said of the national M&A market taking shape.
The San Francisco Business Times, in partnership with Crowell, Weedon & Co. and SNL Financial, offers a database of information from the FDIC on the health of all banks operating in California.
Banks in the Golden State are faring better than their national counterparts.
Mustafa says California has 53 banks that must or should sell and 137 that must or should buy another bank, which means there’s 2.6 potential buyers for every potential seller, compared to a ratio of 1.9 nationwide. In Northern California, which includes San Francisco, Oakland, San Jose, Sacramento and Fresno, there are 58 potential buyers and 26 potential sellers, creating a ratio of 2.2 to 1.
Invictus calculates that California banks that must or should buy, based in part on their prospects for lackluster returns, have free capital to make acquisitions totaling $7 billion, which is more than double the $2.6 billion of stressed-capital requirement needed by banks that must or should sell.
That’s far better than the national picture, where potential buying banks have just 41 percent of the stressed-capital requirement.
Invictus says the “wild card” in California are the 50 banks that really don’t need to buy or sell, but could step into the arena as opportunistic buyers competing with those that must or should buy a bank to boost their returns.
Much of his report echoes what I have heard in conversation with Bay Area community bank CEOs in recent months. I’ve heard that even banks that consider themselves healthy are being advised by regulators to plan on M&A to achieve growth in the years ahead. That’s based on the view that internal growth will be under pressure from new regulations requiring additional capital and pressure on fee revenue. Plus, it’s in regulators’ best interest to find buyers for weak banks.
In outlining his expectations, Mustafa says banks selling earlier will fetch higher premiums than those that wait.
Bank buyers will be seeking mergers to take advantage of efficiencies and to spread the rising cost of compliance across their newly expanded operations. In this new world of M&A, the traditional lure of deposits from core customers will be less of a draw for potential suitors because the industry is awash in deposits.
And the low-rate environment pressuring net interest margins is another challenge for banks as they seek creditworthy borrowers.
“The ravages of flat loan origination will continue to put pressure on these banks,” Mustafa said.
He says the gap between strong banks and their weaker rivals is growing larger. I suspect last week’s U.S. Senate decision to end unlimited federal deposit insurance on transaction accounts not earning interest will accelerate that growing chasm as the risk of a bank failure shifts back to large depositors and off the Federal Deposit Insurance Corp. The unlimited insurance coverage was adopted amid the historic financial crisis to prevent bank runs. But the return of the deposit insurance cap of $250,000 on these accounts should have companies and other large depositors taking a closer look at the health of their community banks.
Some of them are likely to move their money to stronger community banks, or more likely, opt for Wells Fargo, (NYSE: WFC) Bank of America, (NYSE: BAC) JPMorgan Chase (NYSE: JPM) and other major banks that are considered too big to fail.