Banks targeted on merger wave hopes
Activist investors are putting the US banking sector in their crosshairs, betting that headwinds whipping through the industry will accelerate consolidation among lenders.
While these activist hedge funds have already targeted some major financial companies, such as insurer American International Group Inc and auto loan lender Ally Financial Inc., banks have historically stayed out of their sights.
Activists launched 97 campaigns last year aimed at the US financial sector, around triple the amount from 2009, according to Thomson Reuters Activism data. Of those campaigns, 22 were aimed at banks, up from eight in 2009, the data show. The number has increased every year since the 2008 financial crisis. Hedge funds such as Ancora Advisors, Clover Partners and Seidman & Associates are buying up stakes in lenders across the U.S., from community banks to large regional lenders.
Driving these investments is the view that ultra-low interest rates, lagging returns on equity and tough regulations will push more banks to merge, with buyers willing to pay a hefty multiple to a bank's tangible book value. Activist investors interviewed by Reuters say another factor is exposure to energyrelated loans, which is driving down the valuations of certain banks and making them all the more vulnerable to a takeover.
"Bigger banks are back in the market doing deals," said Ralph MacDonald, a partner at law firm Jones Day, who specializes in mergers and acquisitions. US bank mergers and acquisitions volume rose 58 percent last year to $34.5 billion, according to data. Last week alone saw two mergers. Huntington Bancshares Inc said it would acquire FirstMerit Corp for $3.4 billion in stock and cash, combining two Ohio-based lenders. And Chemical Financial Corp. said it was merging with Talmer Bancorp Inc. in an all-Michigan transaction that will create a bank with $16 billion in assets.
To be sure, activists' bets on banks are not without risk - especially if they get the timing wrong. The S&P 500 Financials index is down 14 percent since mid-December on fears that the Federal Reserve will take longer than previously expected to raise interest rates, hurting banks' profitability. Another worry is that oil prices drop further, making a bank's energy loan book more of a liability than an opportunity. A takeout by a larger rival is also never a guarantee, but that is a risk activists are willing to take. On Monday, Hudson Executive Capital, a New Yorkbased hedge fund, announced it had acquired a $56 million stake in Dallas-based Comerica Bank, a lender with $71 billion in assets under management.
Among the banks that could buy Comerica is North Carolina-based BB&T Bank, according to activist investors who spoke to Reuters. David White, a BB&T spokesman said the company does not comment on speculation relating to mergers or acquisitions. Comerica declined to comment. Zions Bancorporation, a Salt Lake City lender with $60 billion in assets, is another bank that activists said is vulnerable to an approach. Zions did not return calls seeking comment.
Comerica's return on common equity is about 7 percent while Zions is around 5 percent. That is also lower than other peers, potentially opening up Zions to criticism that it isn't working its balance sheet aggressively enough.As lenders with more than $50 billion in assets, both banks are labeled systemically important financial institutions (SIFIs), meaning they are subjected to enhanced Federal Reserve supervision and the central bank's annual stress tests. The SIFI label comes with heavier compliance cost burdens that bank executives say hit mid-sized banks harder than the largest institutions, which have the scale to better absorb the cost.