Banks tar­geted on merger wave hopes

The Pak Banker - - FRONT PAGE -

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.

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