Analyst Notes

From recent analyst reports:

Analysts at Keefe, Bruyette & Woods report strong commercial and industrial lending:

Excluding consolidation, loan growth has been more measured at 7.1 [percent] annualized, but still solidly ahead of last quarter’s pace. 

For the quarter, C&I remains the largest source of growth for banks, now up 13.4 [percent] in total, modestly above last quarter’s 11.7 [percent] pace. Consumer lending continued to expand at a solid pace, which we believe may have been aided by increased spending through the holiday season. For the quarter, consumer balances grew 9.9 [percent] across all banks, led by credit cards.

Real estate lending edged higher, benefiting from increased residential mortgage and CRE volumes.  For the quarter, CRE [commercial real estate] grew 3.8 [percent] over 3Q12 levels. While modest, the growth does reflect the first quarter of positive CRE growth at large banks since the end of 2008, suggesting that these banks may have turned the corner on CRE lending after running off these portfolios for nearly four years.

Analysts at Raymond James & Associates predict consolidation over the next five to 10 years, rather than a large wave of acquisitions:

With many of the mega and large regional banks more focused on capital repatriation to more normalized levels (stress test results due in March), meeting Basel III capital standards (countercyclical + SIFI buffers), and improving their valuations, we believe M&A activity in 2013 to again remain largely relegated to smaller deals for banks with assets of $1 billion or less. Indeed, we note that of the 788 announced acquisitions from 2009 through 2012, 705 (89 percent) were for banks with less than $1 billion in assets. With the view that greater scale is needed in the new banking paradigm to combat the costs and time associated with implementing new rules associated with Dodd-Frank, we see more management teams/boards of smaller banks “throwing in the towel” in coming months and years. To this end, we note of the 7,181 FDIC-insured institutions as of 9/30/12, 6,522 (91 percent) had assets under $1 billion, which in our view will continue to be where the majority of deals come from in the nearer-term. Still, we wouldn’t rule out a handful of larger deals similar to what we saw in 2012 (like M&T’s acquisition of Hudson City or FirstMerit’s acquisition of Citizens Republic).

In our view, we see meaningful industry consolidation over the next 5-10 years rather than a large wave that occurs over just a few given our belief that banks are sold and not bought. Using this logic, coupled with an improving (albeit slowly) economy, modestly better asset quality, and shades of loan growth, we believe an M&A target’s view of franchise value will remain above that of potential acquirers. Put another way, we expect the disconnect between buyers’ and sellers’ expectations to remain wide but slowly move closer to equilibrium over time.

SNL Financial reports few conversions of mutuals:

Only 13 conversion deals were completed during 2012, significantly down compared to 20 deals in 2011 and 24 deals in 2010. Seven of the 13 deals were standard conversions and six were second-stage conversions.  As for standard deals, one theory maintains that mutuals specializing in single-family mortgages without too much of a capital cushion will need to look for equity infusions, possibly in the form of a conversion, so as to diversify revenue and minimize interest rate risk. That theory has not panned out so far, but if credit quality worsens, some companies may opt to go public. Excluding the publicly traded [mutual holding companies], pending conversions and pending mergers, 149 mutual thrifts have more than $100 million in total assets, hold at least two-thirds of their loans in single-family mortgages and carry less than 15 [percent] tangible equity to tangible assets.


Naomi Snyder


Editor-in-Chief Naomi Snyder is in charge of the editorial coverage at Bank Director. She oversees the magazine and the editorial team’s efforts on the Bank Director website, newsletter and special projects. She has more than two decades of experience in business journalism and spent 15 years as a newspaper reporter. She has a master’s degree in journalism from the University of Illinois and a bachelor’s degree from the University of Michigan.