Banks are about to start scrambling for capital again.
In the United States that means it will be hunting season for banks looking to make acquisitions.
But because they’re bumping up against rules that limit individual U.S. banks to 10% of national deposits, the hunting party won’t include the country’s biggest banks such as JPMorgan Chase (JPM) or Bank of America (BAC). That leaves the field clear for slightly smaller banks, with solid balance sheets, and a strategy of making smaller acquisitions to fill in their business footprint.
My favorite? In that group it’s US Bancorp (USB). The stock is already a member of the Jubak’s Picks portfolio.
The recommendations for the international Basel III requirements for banking capital and liquidity were released by the Group of Governors of Central Banks and Heads of Banking Supervision Authorities on September 12. That snazzily named group recommended that banks be required to raise their Tier One capital ratio to a key rate of 4.5% and to a total rate of 7%. Both of those are big jumps from the current 2% requirement. The recommendations now go to a meeting of the leaders of the G20 in November for approval.
In addition the committee has recommended an additional 2.5% capital buffer that would go into effect in boom times to make sure that banks have enough capital when the boom turns to bust. A buffer like that is one reason that Spain’s banks have weathered the global financial crisis surprisingly well given the size of the country’s real estate bubble.
The final rules that come out of the November G20 meeting will be phased in over eight years–a compromise between the five year phrase in desired by the United States and the 10 year period lobbied for by Germany.
But when the rules start to phase in during Janaury 2013Â a large number of small to mid-size banks in the U.S. will be faced with a stark choice of raising more capital in an unfriendly capital market or selling.
Banks that won’t be on the prowl for acquisitions include JPMorgan Chase, Bank of America, and Wells Fargo (WFC). Thanks to big deals they did before and during the financial crisis, each now controls 10% or more of U.S. deposits, the most permitted by the U.S. regulators who have to approve a bank acquisition. (The fourth big bank, Citigroup (C), is in the midst of selling assets.)
So which banks will be? Â
Smaller but still large banks such as US Bancorp, No. 5 by deposits, and PNC Financial Services (PNC), No. 6 by deposits, will have lots of playing room.
The biggest competition will come from overseas banks such as Spain’s Banco Santander (STD), and Canada’s Bank of Montreal (BMO) and Royal Bank of Canada (RY).
And there should be some juicy deals out there for acquiring banks given the current low price on bank stocks. The price-to-book ratio on the 24 banks in the KBW Bank Index (BKX) is down to 0.9 from an average of 2.1 from 1993 to 2006, according to Bloomberg.
You’ve got plenty of time to identify buyers and sellers. But it definitely is time to start looking around.
This is a good choice for a Canadian bank, BNS. For Europe I like CS and for the US I like FNFG. Opinions anyone?
I wonder how more acquisitions will effect the dividends of STD and BMO?
guys i know off subject, but i was reading this and i wished everyone would read this as well.
http://www.propublica.org/article/banks-self-dealing-super-charged-financial-crisis
Scion, if you were king of canada would you want gs or bear or lehman buying your banks? I think the answer to your question is because rhey’re not being run by greedy a-holes looking to screw their mothers for a nickel while spending three time the average national salary on a toilet. Seems reasonable to me. Maybe that’s why canadien banks didn’t rob their country’s taxpayers to pay themselves 20 million dollar bonuses.
How do you folks feel about my PBCT?
If American banks can’t buy Canadian banks, why should Canadians banks be allowed to buy American banks?
I realize that a ‘full business footprint’ is generally desirable for banks but I’m not convinced that acquisitions and divestitures will be the only (or even major) factor that determines this footprint in the long term. Moreover, it implies that size and profits and hence stock price are similarly related across the globe, and that the playing field is approximately level for all banks. At the moment I’m holding USB, STD, FITB, and HBC. My suspicion is that the more solid a bank has been historically, the more meager will be its stock appreciation in a wave of asset shuffles. I’ve owned USB on-and-off for ~10 years and it is very momentum-resistant stock. Long term, I expect USB to do the least well among these four and probably STD (which I bought when it was in single digits) to pay the best. I’m keeping my fingers crossed that HBC has guessed correctly on where it’s core business should be and can turn it around! …and it wouldn’t surprise me if an outfit like ZION, who one would expect to be a future asset seller, does significantly better in the stock market as bank health gradually recovers.
What they should do, is consolidate all national banks in to ONE BIG NATIONAL BANK, then do that all across the planet.
Then consolidate all the world’s banks into ONE BIG GLOBAL BANK, …that way any corruption in the international economic system would be impossible because resistance to a GLOBAL BANK would be FUTILE ….