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PCBB Banc Investment Daily July 12, 2013
Banc Investment Daily
July 12, 2013

Mergers & Acquisitions Update

If you live in the New York City area or have visited, you may have picked up the New York Times as you wandered the streets in the morning seeking out breakfast. If so, you know the Times has a section for high society weddings where pictures of attractive couples are included, along with descriptions of educational pedigrees and quality career placements. The section is also known in some circles as the Mergers and Acquisitions page. The Times also has a page called the Deal Book for mergers of the business kind, which got us thinking about bank M&A as of late.
Contrary to expectations bandied about by investment bankers, activity has been relatively slow and steady. Given so much talk among bankers about heavy regulation, a competitive market for booking loans and a low interest rate environment it seems more should be happening. Earnings growth is challenging and acquisitions seem like one way to get there, but perhaps more is at work than just this headline.
Consider that one reason a bank may consider combining forces with another bank is because of the high cost of regulation. A bank president at a banker's conference we attended recently mentioned the amount the bank had spent on compliance in the prior year and it is a whopper. This bank has less than $100mm in assets and another bank with 4x's that amount indicated they were both spending nearly the same to deal with the crush of such heavy regulation. Given this and a handy napkin to work out a deal, it seems easy to paint a picture that these two banks should merge.
However, more meets the eye, so we consider a recent KPMG survey to see what surfaces and why activity remains slow. It found about 13% of executives said they were considering engaging in mergers and acquisitions this year vs. 21% that said so last year - a 38% drop. Further, they indicated less likelihood of engaging in divestitures, with only 8% anticipating selling assets vs. 13% in 2012. A full 76% of respondents anticipated revenue increases, so there should be plenty of cash to do deals. It seems the stars are aligned here, so what gives?
For banks interested in merging, the survey found regulation was the largest barrier. It was cited by 57% of respondents vs. only 40% a year ago. Whether that is due to the fact much more of Dodd Frank is still to come, the crackdown on consumer, capital changes around Basel III or whatever, there may be just too many moving parts to come up with a decent price that both parties can accept. Even if that piece were easy, regulators are taking a hard look at potential acquirers and making every effort to determine whether a deal would increase or decrease the risk profile of the bank. That increases the risk so prices must move.
As if that weren't enough, consider that banks may also be waiting for higher valuations. After all, the credit crisis is over, no new banks are being formed and supply and demand must matter at least in some regions.
No matter the reason(s) you think may be contributing to the slow drip, drip of activity, we note there are still around 7,000 institutions in the country, so the decline is likely to continue (only the speed is in question). We'll update this topic again soon, but at least for the moment, it seems activity will remain slow until more certainty in the industry is reported.