Monday, August 16, 2010

FIG Partners LLC's Weekly Musings 8-16-10: M&A Freeze Until the Dust Clears?


Recently, we’ve heard from some banks that regulators are discouraging traditional M&A opportunities. We are also hearing that the “freeze” could last as long as 12 months. At this point in the banking industry there are any number of reasons regulators could balk towards merger transactions … from maintaining the pool of potential bidders of failed banks, to concern that the acquiring bank might fail in the near-term (i.e., for reasons not clearly obvious at acquisition).

Whatever the rationale, regulators might be right to hold off on approving traditional M&A transactions. While there are certainly fewer commercial banks today (6,839 in 2009, compared to 8,582 in 1999, according to the FDIC), the Pre-Tax, Pre-Provision Income per bank has improved significantly to $36.5 million vs. $15.4 million a decade earlier. How long regulators are able to prevent banks from merging (especially healthy banks) might not be as long as some may think.

Although “Pre-Pre” earnings are higher in the last 10 years, today’s average bank also pays nearly two-times more in non-interest expenses ($51.6 million vs. $23.8 million in 1999). There is a clear need for institutions to become more efficient … and ultimately we think there is a mandate among the regulatory agencies to shrink the number of banks under their supervision.