In May, the Federal Reserve approved the Chinese state-controlled Industrial and Commercial Bank of China’s purchase of an 80 percent stake in the U.S. subsidiary of the Bank of East Asia, marking the first time a Chinese bank was allowed to acquire a majority stake in a U.S. bank. This has left many to wonder, is this likely to become a more regular occurrence? And on top of that, if international players become potential acquirers over the next few years, where will they come from? We asked this of Bank Director’s panel of bank attorneys, and while some think foreign acquisitions won’t be popular for years to come, others offered interesting insight on where they think the most probable players will come from, Asia being the most common answer.
Do you expect international acquirers to play a significant role in the U.S. bank M&A market over the next two to three years?
Not likely. European banks are out. Brazilian banks can do better in Brazil. The Federal Reserve Board’s approval of a major Chinese bank’s plans to acquire a small bank in Chicago is legally significant, because of the finding that the applicants are subject to comprehensive supervision on a consolidated basis. It is unlikely, however, that there will be a Chinese acquisition of a significant U.S. bank in the near term. The acquisition of Pacific Capital Bancorp by Union Bank, N.A., a member of the Mitsubishi UFJ Financial Group, could be a harbinger. With ample capital ratios, excellent U.S. regulatory relationships, and low growth prospects in Japan, MUFJ and other major Japanese banks should be looking to increase their market share in the U.S.
—Gordon Bava, Manatt, Phelps & Phillips
The struggling U.S. economy, combined with U.S. banks facing weak balance sheets and increased regulatory pressure, makes for an unattractive environment for foreign bank buyers. Until the U.S. sees sustained, favorable economic data related to real estate values, the housing market and employment, foreign banks are unlikely to actively acquire U.S. banks. Asian banks are facing slower growth in their host countries and therefore are not likely to have the momentum to initiate U.S. acquisitions. Banks in higher growth economies in the Middle East and South America may be tempted to look to the U.S. banking market for expansion opportunities, but are likely to be deterred by the environmental issues in the U.S., as mentioned.
—Christopher Zinski, Schiff Hardin LLP
The Fed actually decided to confer Comprehensive Consolidated Supervision (CCS) status to three state-owned Chinese banks, which opens the door for Chinese banks to enter retail commercial banking in the U.S. Moreover, the Fed’s recent risk weighting of investments in foreign banks and sovereign debt would portend an increasing willingness to credit the banking regulatory system of the BRIC countries [Brazil, Russia, India and China] as acceptable, thereby removing a high hurdle for most foreign banks to acquire U.S.-chartered banks. This could come as a propitious moment for both Chinese and U.S. banks, as the bidding for large banks has been tepid and encumbered by too-big-to-fail restraints. It’s a buyers’ market and the Chinese, unlike the Japanese who bought in at the height of the real estate market of the ‘70s, are shrewd buyers and know that there are bargains galore. Chinese and other BRIC country banks will be a significant factor in the U.S. bank acquisitions once the full effect of the Fed’s decision is felt. This will still take some time to evolve as the Fed will move cautiously to assure itself that individual banks have the strength to support U.S. subsidiaries.
—Doug Faucette, Locke Lord
International acquirers should be playing a significant role in the U.S. bank M&A market, but on the sell-side, not the buy-side. The compound effects of Dodd-Frank and other countries’ equivalent laws, regulations or policies, as well as increasing and complicated capital requirements under Basel III are likely to restrain the ability of international acquirers. The next few years might well be an opportune time for international institutions to sell U.S.-based financial institutions and businesses to shore up capital ratios and de-leverage non-U.S. businesses.
—Doug McClintock and Sara Lenet, Alston & Bird
Yes, international acquirers are likely to play a significant role in the next few years. That said, two things are worth noting. First, the substantial majority of U.S. bank M&A transactions will likely be domestic deals. With over 7,500 individual banks and thrifts, the United States still has the most disverse banking sector in any modern financial system. The lingering effects of the Great Recession, capital constraints, technological issues, and the tidal wave of new regulations under Dodd-Frank will drive domestic consolidation. Second, international acquirers are likely to hail from Asia (as well as Canada and possibly Mexico) instead of Europe. On the whole, European banks are likely to pursue retrenchment strategies to ensure they emerge from the Eurozone crisis intact—a strategy that will not likely involve aggressive acquisitions in the United States.
—Heath Tarbert, Weil, Gotshal & Manges
European banks may continue divesting their interests in the U.S. financial services sector, as they focus on addressing challenges at home and meeting Basel III capital requirements. Investors in U.S. financial services are likely to come from Asia, particularly from China, now that the ice has been broken by the first Fed approval of the acquisition of control of a U.S. bank by a Chinese-based bank.
—Henry Fields, Morrison Foerster