The anticipated wave of U.S. bank consolidations, led in part by Canadian banks, appears to be underway. Canadian institutions have acquired two U.S. banks over the last three trading days. Toronto-Dominion Bank's (TD) $6.3 billion all-cash purchase of Chrysler Financial, announced on Tuesday, came on the heels of the Bank of Montreal's (BMO) $4.1 billion all-stock purchase of Marshall & Ilsley (MI) last Friday. Analysts believe these events may be the start of more merger and acquisition (M&A) activity among U.S. banks -- and they expect that trend to accelerate in 2011.
Financial stocks, which have lagged on the S&P 500 most of the year, rallied on the two deals. The S&P 500 Financials Index was up 3.42, or 1.6%, on Tuesday, closing at 212.19.
TD Bank stock closed up 3.5% at $71.95 on the news, and Bank of Montreal traded at $56.80, up 2.2% on Tuesday. Several analysts generally view the two Canadian acquisitions favorably and project increased M&A for 2011.
Some U.S. Banks Now "Attractive Takeover Targets"
Morningstar equity analyst Jim Sinegal even suggests the Bank of Montreal's willingness to pay a significant premium for Marshall & Ilsley could represent a turning point. Prior to these deals, the Federal Deposit Insurance Corp. (FDIC) had participated in the majority of the billion-dollar bank acquisitions in 2010 -- as it disposed of failed banks on the cheap.
Now with all the prime assets gone, banks on the FDIC's "troubled bank" list have average assets of about $500 million, making it less likely that larger banks will pursue them. As a result, banks not on the FDIC list -- those that survived the financial crisis but have few growth opportunities -- are now attractive takeover targets that can yield higher returns for shareholders.
"It's possible that this deal could both increase the willingness of other hobbled financial institutions to sell and provide notice to potential buyers that the days of cheap FDIC-assisted deals and last-minute takeunders [offering a firm significantly less than market value for its share prices] are coming to an end," Sinegal wrote in an analyst's note last week.
The Consolidation Trend Should Continue
In fact, the investment bank and financial services research firm Keefe, Bruyette & Woods (KBW) predicted last July that Canadian banks would begin buying some U.S. banking assets -- with Marshall & Ilsley projected as a takeover target in that report.
For 2011, KBW predicts significant M&A among the nearly 8,000 remaining U.S. banks. During a recent press briefing in New York, KBW President and Vice Chairman Thomas Michaud said KBW expects the consolidation in the financial services industry -- a trend that began prior to the current financial crisis -- to continue. According to Michaud, now that many banks have raised capital requirements exceeding regulatory levels and have excess cash on their balance sheets, they're in position to buy small and midsize banks that are only now experiencing the problems that larger banks have already worked through.
And federal regulators are more comfortable with the idea of having fewer banks that are better capitalized and stronger, and their potential consolidation, Michaud said, helps that goal.
Most Likely List
The KBW report highlighted as most likely to be acquired banks including Abington Bancorp (ABBC), Boston Private Financial Holdings (BPFH), Cardinal Financial (CFNL), Encore Bancshares (EBTX), Susquehanna Bancshares (SUSQ) and Western Alliance Bancorp (WAL). KBW viewed those banks as having "an attractive footprint, a high proportion of low-cost deposits, above-average normalized earnings power, and strong fee-income businesses with high barriers to entry."
And if these recent deals by Canadian banks don't jump-start M&A, KBW says activity will pick up by the middle of 2011.
"If our outlook is right, we will see acceleration in the back half of 2011 and definitely into 2012 of what we see as open bank and friendly acquisitions – hopefully at some premiums," said KBW chief equity strategist and associate director of research, Frederick Cannon. Many shareholders will be looking forward to that.
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