If Britain goes through with the Brexit, we expect to see consolidation in the financial sector as banks based in the United Kingdom try to better position themselves in continental Europe, says Michael Berger. Here, the Associate Editor of MoneyShow.com highlights one bank he expects to be acquired as well as two US banks he is favorable on.
The financial sector has been significantly affected by Britain’s decision to leave the European Union, which undermined the market’s confidence in banks.
The Brexit impacted the entire financial sector and European-based banks in particular have suffered the brunt of this weakness. Moreover, this impact has significantly increased the probability of cross-border M&A between large cap banks.
Although the amount of M&A activity between North American and Western European banks in the past six years has been less than half that of the previous six, Britain’s decision altered the environment and made these types of deals much more possible in the eyes of regulators.
The market has already started to see some form of industry consolidation in the financial industry in Abu Dhabi, in China and in North America.
Germany’s Largest Bank a Takeout Candidate?
Deutsche Bank (DB) has plunged approximately 30% during the last two weeks and is trading at a quarter of its book value. This weakness has made DB an attractive candidate for a merger with a U.K. based bank looking for European exposure.
An article published by Bloomberg highlighted Barclays (BCS) as a possible merger candidate for DB. We think this is a good possibility as Barclays CEO Jes Staley has previously said that the company needs a European champion to be able to challenge leading United States banks.
The combined company would be larger than JPMorgan (JPM) and would take home the title as the world’s largest trading firm. The deal makes sense for BCS because it would better position the London-based bank in continental Europe.
We believe that a merger is very likely as banks try to improve market sentiment and gain back investor confidence.
Continue to Prefer US Banks
We think Deutsche Bank is an attractive investment opportunity at current levels as DB is now trading more than 50% below its 2009 lows. In addition, we are also very optimistic on the outlook for select domestic-based banks. We recommend taking a look at Signature Bank (SBNY) and BGC Partners (BGCP).
Signature Bank continues to be one of the fastest-growing banks in the industry. We are favorable on SBNY as its unique operating model of acquiring experienced private client teams has driven strong deposit and loan growth. The company provides a lot of autonomy to the teams it acquires and this has kept costs low, resulting in SBNY having one of the best efficiency ratios in the financial industry.
Signature’s growth profile is not dependent upon rising rates and it has been able to maintain best-in-class credit quality. SBNY has fallen almost 20% this year as taxi medallion and commercial real estate credit risks – which we consider to be overdone -- has served as a headwind for the shares. We expect to see SBNY continue to show best-in-class growth, which should result in price-to-earnings multiple expansion.
BGC Partners offers investors an opportunity to invest in a bank that has significant long-term upside and offers a large dividend (7.5% yield). BGCP has fallen more than 15% this year and we expect to see the shares move higher as it unlocks the value inherent in its commercial real estate brokerage segment and realizes synergies from its acquisition of GFI Group.
We also expect to see the company utilize its more than $1 billion in cash and marketable securities to make accretive acquisitions and repurchase stock.
