International M&A: Will China Buy More U.S. Banks?


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?

Gordon-Bava.jpgNot 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

zinski_christopher.jpgThe 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

Doug-Faucette.jpgThe 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

Douglas-McClintock.jpgInternational 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

Heath-Tarbert.jpgYes, 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

henry_fields.jpgEuropean 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

From Asia: M&A Transactions on the Rise


global-deals.jpgAsian deal making kicked off 2011 in high gear. According to an October released survey by PwC’s Asian operations, deal optimism over the next 18 months is high. Of 375 Asian bank executives polled almost half indicate that their organization will undertake an M&A transaction in the next year and a half.

So what does this mean to the average
U. S. banker?

For one thing it means North American financial institutions trying to break into attractive high-growth Asian markets via acquisitions will face stiffer competition. Countries like Japan, Korea, Singapore and Australia with Asia’s most mature but slower growing markets will be bidding against U.S. and European firms for assets. China, which has already begun staking a claim in Southeast Asia and more eager than most to increase business lines, will likely build the competition for viable targets even further.  To make things tougher for U.S firms, PwC’s survey indicates successful cross-border transactions in the region are most common when there is a strong cultural bond, giving an extra edge to intra-regional bids.

On the flip side, acquirers in the U.S. don’t have much to worry about when it comes to competition from Asian bidders. The percentage of Asian firms interested in potential North America acquisitions is quite low. Only 1 percent of those surveyed by PwC indicated an interest in buying their way into the slow growing North American market. Africa, the Middle East and Latin America hung near the bottom of the list with the U.S. Only banks in struggling European economies proved to be less interesting than U.S. banks to Asian acquirers.

Lack of interest may not translate into NO transactions with American and European firms, though. PwC notes that even though most Asian assets belonging to troubled U.S. and European financial institutions have already been unloaded, Asian bankers indicated strategic assets offered by foreign firms would continue to be viable targets.

If not U.S. bound, where are Asian acquirers looking?

High growth markets are most attractive to Asian buyers. It’s no surprise then that China tops the wish list. While government policies and lack of verifiable information make M&A transactions difficult within China, financial institutions from other Asian countries seem more than willing to risk the unknown to get a foot in the door.

Aside from China, the strongest attraction is Singapore, Hong Kong and Taiwan. And Southeast Asian countries like Malaysia, Indonesia and Thailand are not to be left out of the mix. Southeast Asia is attracting growing attention because of expanding economies and liberalizing financial markets.

Despite excitement surrounding outbound M&A in Asia, the bulk of interest lies within domestic borders. Bankers in PwC’s survey indicate increased market share and capital efficiency are the primary reasons for domestic deals. They also point to a desire to broaden product offerings as a deal consideration. Most Asian bankers believe these three goals can best be met at home. As a result, PwC suggests domestic transactions will make up the bulk of the region’s activity.

Does all this interest translate to a booming Asian M&A market?

Perhaps the answer to that should be a resounding YES. However, this increased M&A interest by bankers in the region doesn’t guarantee clear sailing for transactions domestically or outbound for Asian firms. Three potential stumbling blocks could potentially put the brakes on activity.  Capital restrictions, regulatory concerns and increasing government involvement all have the potential to slow the activity. Couple those factors with a lack of verifiable financial information and pricing gaps, and transactions could prove slower than the optimistic view presented in PwC’s survey.

What the Future Holds for Banks & Bank Director


 

future.jpgIn 1991 when I helped start Bank Director, the experts predicted technology and regulation would winnow the number of banks down to 2,000 over the next twenty years. The thought was that technology would ultimately make it impossible for the smaller banks to compete without economies of scale to justify the expense of implementing new technology.

The experts who predict our futures are often wrong. The new technologies turned out to be an asset to all banks and in fact, leveled the playing field for the institutions that could adapt technology solutions to their unique customer needs. In addition, they forgot that smart bankers go out and start new banks when theirs are bought, and that customers tend to support the financial institutions within their communities.

This fall, our parent company, Board Member Inc. sold our sister publication Corporate Board Member magazine to the New York Stock Exchange. However, Bank Director wasn’t sold because our owner saw a great future for the brand given our unique position in the marketplace and the many opportunities we foresee as the banking business rebuilds itself once again.

Twenty years later I am more excited than ever to be part of a growing enterprise that supports the bankers who lead every kind of institution from the largest international banks to the main street community banks. I fear to predict anything that might happen to the banking industry in the next twenty years, but in the next few I think we can speculate that:

  • approximately 200-300 more banks will fail;
  • many more will merge as the cost of compliance rises;
  • and international banks may give our largest institutions new competition.

No one knows for sure about the future, but I can say with certainty that Bank Director will be there in the middle of it all.