I am still on alert for a larger pullback in the market. The larger picture suggests the SPX will li...
Look for another wave of bank acquisitions
09/13/2010 2:43 pm EST
In the United States that means it will be hunting season for banks looking to make acquisitions.
But because they’re bumping up against rules that limit individual U.S. banks to 10% of national deposits, the hunting party won’t include the country’s biggest banks such as JPMorgan Chase (JPM) or Bank of America (BAC). That leaves the field clear for slightly smaller banks, with solid balance sheets, and a strategy of making smaller acquisitions to fill in their business footprint.
My favorite? In that group it's US Bancorp (USB). The stock is already a member of the Jubak's Picks portfolio.
The recommendations for the international Basel III requirements for banking capital and liquidity were released by the Group of Governors of Central Banks and Heads of Banking Supervision Authorities on September 12. That snazzily named group recommended that banks be required to raise their Tier One capital ratio to a key rate of 4.5% and to a total rate of 7%. Both of those are big jumps from the current 2% requirement. The recommendations now go to a meeting of the leaders of the G20 in November for approval.
In addition the committee has recommended an additional 2.5% capital buffer that would go into effect in boom times to make sure that banks have enough capital when the boom turns to bust. A buffer like that is one reason that Spain’s banks have weathered the global financial crisis surprisingly well given the size of the country’s real estate bubble.
The final rules that come out of the November G20 meeting will be phased in over eight years--a compromise between the five year phrase in desired by the United States and the 10 year period lobbied for by Germany.
But when the rules start to phase in during Janaury 2013 a large number of small to mid-size banks in the U.S. will be faced with a stark choice of raising more capital in an unfriendly capital market or selling.
Banks that won’t be on the prowl for acquisitions include JPMorgan Chase, Bank of America, and Wells Fargo (WFC). Thanks to big deals they did before and during the financial crisis, each now controls 10% or more of U.S. deposits, the most permitted by the U.S. regulators who have to approve a bank acquisition. (The fourth big bank, Citigroup (C), is in the midst of selling assets.)
So which banks will be?
Smaller but still large banks such as US Bancorp, No. 5 by deposits, and PNC Financial Services (PNC), No. 6 by deposits, will have lots of playing room.
The biggest competition will come from overseas banks such as Spain’s Banco Santander (STD), and Canada’s Bank of Montreal (BMO) and Royal Bank of Canada (RY).
And there should be some juicy deals out there for acquiring banks given the current low price on bank stocks. The price-to-book ratio on the 24 banks in the KBW Bank Index (BKX) is down to 0.9 from an average of 2.1 from 1993 to 2006, according to Bloomberg.
You've got plenty of time to identify buyers and sellers. But it definitely is time to start looking around.
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