Most banks would like to grow but some have found it easier than others. Let’s look at a few perceptions and statistics about growth and a few opportunities to exploit it as well.
Many bankers feel that given the legislative and regulatory environment coupled with low rates, low margins, low loan demand and high competition, growth is very difficult. For those who experience this, they should consider selling. Far too many banks are seeing their franchise value diminish by not doing so. The good news is they can sell for a nice price and even receive stock from an acquirer improving their future growth and returns potential. Plenty of banks are able to do this. Bank stocks have outperformed the S&P 500 for the first six months of 2015 (8.56 percent vs. 1.09 percent), and should continue to do so based on their relative intrinsic values.
While the nation’s top five largest banks have over 80 percent of the industry’s assets, community banks, on average, have grown six times faster in terms of revenue growth. Assets of banks between $100 million and $1 billion have grown 27 percent from 1985 to 2013. Assets of banks larger than $10 billion have grown only 4 percent.
The banks showing the most growth have created that growth from three areas:
- Organic loan origination
- Mergers and acquisitions including branch acquisitions
- Fee-related businesses such as:
- Cash management.
- Trust and wealth management
- Brokerage services
- Insurance and other related offerings
Growing by acquisition is much easier for smaller banks than larger ones, which suffer from “too big to fail” scrutiny and acquisition limitations. Of the 301 deals done in 2014, only five had deal values in excess of $500 million. Most of the activity is in small banks. While the total number of financial institutions has shrunk from 15,158 in 1990 to 6,419 today, the number of banks between $100 million to $10 billion in assets has grown from 4,194 in 1995 to 4,400 at March 31, 2015: a growth rate of 5.9 percent, representing over 68 percent of the number of financial institutions.
The M&A activity will remain healthy for the next several years as those who do not have the ability to grow and cope with the pressures will have to sell.
The keys to good M&A transactions are having ready access to debt and capital, an ability to strike quickly and efficiently, and a reputation for execution. A good capital plan can deal with the first issue, having capital available in all forms: senior/junior debt, preferred stock, privately placed retail and institutional capital, as well as public offerings. Pricing and placing the capital varies among investors and investment banks and can be more inefficient than most would think. The biggest inefficiency is placing subordinated debt with origination costs varying 1 to 3 points and rate differences of 2 to 3 points, even among banks whose funding capabilities should be equal. The ability to make a purchase offer quickly is an internal issue and is based on structure, experience and fast decision making processes. Quite frankly, most bankers are not as good as they think they are, and unfortunately this affects the issue of buyer reputation.
An open, honest assessment of the banker’s capabilities can do wonders for improvement of an acquisition success rate. There are many investment banks and consultants ready to help if asked and most would charge little or nothing for the added opportunity to be the advisors on the next deal.
The leading non-interest income area of growth targeted by banks is trust/wealth management. Yet far too many banks enter trust/wealth management without a proper assessment of what is realistic for time frames, opportunities, profitability and competitive advantage in products. There are good products, bad products, low margin and high margin in both, as well as high and low levels of competition. Most think they have the expertise to deal with all the new products and opportunities, but few do. Entering into niche opportunities such as alternative assets, 401(k) programs, or asset allocation models, while showing the most promise, are fraught with roadblocks and disappointment if not executed correctly.
By optimizing capital levels, opportunity sets and product lines as well as pursuing M&A opportunities, a good, clean, well run bank with a green light from regulators can grow at a very rapid rate over the next few years, increasing franchise value for the community bank and its investors.