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3 Reasons More Bank Deals Are Ahead

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:

  1. Lower funding costs
  2. Grow
  3. 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.

John Maxfield pointed this out as a potential opportunity for New York Community Bancorp  (NYSE: NYCB  ) as it looks to take the next big step forward.

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. 

Attractive valuations
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. 

Big deal(s)
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.

A potential target?
At more than $5 billion, Huntington Bancshares  (Nasdaq: HBAN  ) would be a hefty acquisition target. Whether or not this is a potential banking buyout, though, it's still a reasonably priced bank with an eye on growth. But is it a buy right now? To help you figure that out, I invite you to read our premium research report on Huntington today. Click here now for instant access.

Read/Post Comments (2) | Recommend This Article (11)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 27, 2012, at 4:19 PM, TMFBlacknGold wrote:


    Great post here. Do you have any opinion of quickly growing PNC? I may be a little biased as I live in Pittsburgh, but they're in great health, have a growth mindset, and have plenty of room to run. Interested in your thoughts.



  • Report this Comment On November 27, 2012, at 10:03 PM, TMFKopp wrote:


    At the risk of mincing words, I'll just say that there aren't a whole lot of banks that I don't like right now.

    As for PNC in particular, I think the mid-sized to larger regionals have a good opportunity to grow as the economy continues to recover. The B of A, Citi, and JP brands have taken it on the chin and I think there are a lot of potential customers that are ready to hop on with a bank that hasn't had the same front-page problems.

    Continuing on the dealmaking theme, putting together a blockbuster deal among larger regionals may be tough from a regulatory perspective, but I wouldn't be shocked to see some larger combinations come together in some consolidation moves.


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