US banks endure despite dealmaking drive

F8ANXN A logo sign outside of a facility occupied by the Teachers Insurance and Annuity Association ? College Retirement Equities Fund©Alamy

TIAA acquired EverBank for $ 2.5bn

Another one bites the dust. EverBank, the online-focused lender, agreed this week to a $ 2.5bn takeover from the pensions group TIAA. It becomes the 122nd US bank to be bought so far this year.

The recent run of acquisitions in the sector remains more a steady stream than a deluge, however. There are still about 6,000 lenders across the country, according to Federal Deposit Insurance Corporation data — raising the question of why more deals are not being done in such a highly fragmented industry.

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There is no shortage of factors advisers can point to to argue that the dealmaking drive will accelerate. As the latest round of underwhelming financial results illustrated last month, rock-bottom interest rates are eating away at retail banks’ profit margins.

Lenders are also grappling with a series of regulations — from capital and liquidity to money laundering and terrorism. Technology is testing traditional business models, and competition from non-traditional operators is on the rise.

For investment bankers selling prospective deals to management teams, it should all make for a straightforward pitch: by bulking up, you can cut expenses — and spread them across a wider pool of assets.

“Scale is more important than ever,” says Jerry Wiant, co-head of US financial institutions at RBC Capital Markets.

Advisers maintain that banks with similar geographic footprints should generate expense savings of between 30 and 40 per cent by combining — and that even those with no overlap should cut costs about a fifth.

Despite such apparent attractions, investors in a few US banks that have pushed the button on acquisitions recently have appeared unenthusiastic. Buyers’ share prices have been dented by worries over whether such complex businesses can be integrated successfully, as well as uneasiness over some of the prices paid. YNB dropped 9 per cent on the day last month that the Pittsburgh bank disclosed its agreement to buy North Carolina-based Yadkin for $ 1.4bn.

The latest acquirer in the sector, TIAA, does not have that problem. A not-for-profit group best known for meeting the retirement needs of teachers and academics, the pensions provider does not have to justify its decisions to Wall Street.

It is not just scepticism from investors that would-be buyers of banks need to overcome, though. While toughened post-crisis regulations tempt more lenders to turn to dealmaking to boost returns, at the same time they also present barriers to further consolidation.

Watchdogs believe the bigger banks become, the bigger risk they pose to the economy — making deals involving the largest lenders, such as JPMorgan Chase and Bank of America, very difficult if not impossible. Regulators have also made takeovers further down the food chain more time consuming, costly and cumbersome.

“It used to be you called the regulators on a Sunday night before the deal was announced on the Monday,” says another adviser who declined to be named.

US banks

Now supervisors take months to approve deals, scrutinising everything from how customer complaints will be handled to the number of ATMs left on the street. The most notorious example investment bankers point to is M&T’s purchase of New Jersey-based Hudson City. The two parties agreed the transaction in 2012, when it valued the target at $ 3.7bn, but they took more than three years to get the green light.

The eventual approval of that deal last November boosted hopes that a flood would follow. Yet it has been slow to materialise. So far this year, $ 18bn worth of acquisitions have been announced, according to Dealogic, following $ 33bn in 2015. That is far behind deal-heavy sectors such as healthcare and a far cry from the pre-crisis years. Between 2003 and 2007, an average $ 88bn worth of US bank purchases were agreed annually.

Still, the pressures on retail banks are not going away. So far they have succeeded, to an extent, in combating pressures on their business models — not just by cutting costs, but also by lending more. In doing so, however, they have attracted increased regulatory scrutiny. In particular, advisers highlight a crackdown in the past six months or so on risky commercial real estate (CRE) lending.

Earlier in the summer, Suffolk Bancorp agreed to be bought by People’s United for about $ 400m after the New York-based lender cited CRE pressures and warned it may not be able to “maintain compliance” with regulators’ capital requirements.

Analysts at KBW have drawn up a list of potential sellers among listed lenders of a similar size. It comprises Flushing Financial, Guaranty Bancorp, Independent Bank, MutualFirst Financial, Seacoast Banking Corporation of Florida, State Bank Financial, and United Financial.

Foreign buyers could also help lift M&A. Several Canadian banks have turned south of the border in the face of a slowing economy. The latest example came earlier this summer when Canadian Imperial Bank of Commerce agreed to buy Chicago-based PrivateBancorp in a transaction worth about $ 3.8bn.

Dealmakers also say prospective Chinese buyers have shown some interest in US banks. Again, however, supervisors present a potential stumbling block. “For Chinese entities with government backing, it will be complicated to get regulatory approval in the US,” says Edwin del Hierro, a corporate partner at law firm Kirkland & Ellis.

The EverBank deal has attracted attention given the unusual identity of the buyer. Yet TIAA has been diversifying its business beyond pensions, and began offering banking services four years ago. It believes the purchase will allow it to sell TIAA’s widening range of investment products to EverBank savers — and the bank’s banking services to the pension group’s existing customers.

Still, advisers do not pretend there are long queues of pension funds, insurers or other unorthodox groups lining up to buy US banks. Many of the same regulatory restrictions that are discouraging banks to purchase their rivals are also putting off other types of would-be acquirer. “The challenge is, when you buy a bank, you become a bank,” as Mr Wiant of RBC puts it.

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