Don't look now, but more banking buyouts could be on the way.
American Banker this morning highlighted the capital-raising going on at a few Chicago-area banks, including Taylor Capital (NASDAQ:TAYC). AB posited that the combined $260 million raised could mean deals ahead for that region and that was backed by Taylor's CEO noting that:
[Deals could happen] in a number of ways: [FDIC-]assisted transactions, unassisted transactions. And we also think there will be some good chances that branches will be sold in areas where we want to be.
Sure, Taylor is a small $500 million bank, but deal-making in the sector is something we should have our eye out for. There are at least three good reasons banks may be looking to buy now:
- Lower funding costs
- Attractive valuations
Lower funding costs
One of the biggest challenges facing banks right now is the low interest rate environment, which is pinching the spread that banks are making on their lending. Since banks take in funds from a variety of different sources, they can lower their funding costs -- and thereby increase their spreads -- by increasing the share of low-cost funding like deposits. What's one really good way of increasing deposits quickly? Buy another bank with a nice, big deposit base.
Sure, banks may always have some desire to grow, but it may not always be a great idea for them to grow (think circa 2007). But what about right now? The economy is (slowly) on the mend, as is the housing market. Some of the largest banks like Bank of America (NYSE:BAC) and Citigroup (NYSE:C) are shrinking rather than growing as they try to convince investors that their balance sheets aren't a mirage. This would seem to present a good opportunity for smaller and mid-sized banks to do some land grabbing.
Valuations for banks are up considerably over the past few years, but they're still a far cry from pre-crisis levels. Or longer-term historical levels for that matter. While the above two reasons for bank buyouts are all well and good, if acquisition targets weren't available at reasonable prices, it'd be harder to justify deals aimed at growth or improved funding. As of right now, there are still an awful lot of publicly held U.S. banks that are trading at or around (and yes, below) tangible book value.
Granted, a bank that's trading below tangible book may not be a bank that's in tip-top shape. But I think in a lot of cases, the valuations overshoot the actual condition of the bank. Not to mention that a bank with an unenviable balance sheet is a different matter when it's put in the hands of a larger, stronger bank.
We've already seen a bunch of notable deals this year. Over the summer, M&T Bank (NYSE:MTB) announced the acquisition of Hudson City Bancorp (NASDAQ:HCBK) for a cool $3.7 billion. UnionBanCal just recently had its early 2012, $1.5 billion acquisition of Pacific Capital Bancorp (NASDAQ:PCBC) approved by the Fed. And in the broader mortgage arena, Ocwen Financial (NYSE:OCN) and Walter Investment Management (NYSE: WAC) teamed up to grab ResCap's loan-servicing unit for $3 billion, while Berkshire Hathaway (NYSE:BRK-B) shelled out $1.5 billion for ResCap's loan portfolio.
What's next remains to be seen. We'll likely see a lull for the time being due to the holidays and that Fiscal Cliff thing, but as we head into 2013, keep an eye out for more bank-on-bank deal-making.
Fool contributor Matt Koppenheffer owns shares of Bank of America and Berkshire Hathaway. The Motley Fool owns shares of Bank of America, Citigroup, and Huntington Bancshares. Motley Fool newsletter services recommend Berkshire Hathaway and Ocwen Financial. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.