ISN’T IT HIGH TIME the industry started thinking more aggressively about expanding through bank mergers or acquisitions? I only ask because while activity so far this year has been pretty lame, the data suggest that the sector is on the up-and-up.
I’m certainly not suggesting banks should make opportunistic or financially-engineered deals. The long and rocky road of doomed aspirations and the bleached bones of adventurer CEOs will attest to how foolhardy that strategy has been through the cycles.
But we’ve also seen precious little pre-emptive tactical positioning from banks. And that includes from the private equity community that’s got all that firepower to put to work.
On the data front, the most recent update to the EBA’s periodic risk dashboard – summarising the main risks and vulnerabilities in the European banking sector – confirms the positive trend of EU banks’ capital positions. Based on Key Risk Indicators from 55 banks using Q314 data, the the aggregate CET1 ratio hit a chunky 12.1%, an increase of 30bp over Q214 and the highest since 2009.
The improvement was driven by an increase in capital issuance and via retained earnings, which outpaced the growth in risk-weighted assets. Leverage continues to come down: the loan-to-deposit ratio hit at an all-time low of 109.3%, while customer deposits to total liabilities came in at 49.2%, a record high.
For sure, there are still weaknesses in the sector – elevated, albeit stable non-performing loans; volatile and low profitability; and subdued returns. This is the result, the EBA says, of the weak macroeconomic environment, the clean-up of some major banks’ balance sheets, and pesky litigation costs.
Confidence still remains subdued in the face of the sheer amount of regulatory drudgery and structural repositioning
BUT ON THE basis that the global economy is on the road to improvement in key areas (and assuming the other two elements are temporary impediments), I’d have thought the cyclical positives outweigh the non-structural negatives, so picking your spots and taking the plunge now at today’s prices might be a good ploy.
In their European Credit Alpha credit strategy report dated March 20, Barclays analysts were pretty upbeat: “While euro area growth prospects appear modest and the inflation outlook remains challenged, eliciting the ECB response, European bank credit fundamentals remain strong despite the weak macroeconomic backdrop.
“As evident in 4Q earnings, asset quality continued to improve, driven by lower NPL inflows, as well as portfolio disposals. At the same time, banks’ capitalization increased further, with the fully loaded Basel 3 CET1 ratio rising to 11.6% (for the major European banks we track).”
That’s a pretty respectable backdrop. Yet a glance at financial sector M&A perhaps shows that the key element of confidence still remains subdued in the face of the sheer amount of regulatory drudgery and structural repositioning still to get through. We still don’t have clarity on key aspects of the regulatory story – not least where we’re going to end up on the TLAC/MREL capital journey – so deal reticence is perhaps understandable.
The deals to-date in 2015 have been episodic and bank-specific as opposed to anything approaching a trend. In fact, there’s probably been more appealing activity in the insurance sector.
Not surprisingly, perhaps, the biggest bank deals so far in 2015 have been in the Americas. Royal Bank of Canada’s acquisition of Los Angeles-based City National weighs in as the biggest deal to-date at US$5.4bn. Meanwhile, Springleaf Holdings beat out rumoured potential rival bids from Fortress and Centerbridge to acquire subprime lender OneMain Financial – whose origins lie in Sandy Weill’s Commercial Credit – from Citigroup for US$4.25bn.
In Europe, Spanish banks have been making the running. Banco Sabadell emerged as a buyer of the UK’s retail bank and Lloyds Bank unit TSB for US$2.5bn to build a more diversified ex-Spain revenue profile and capture the upside from a lively (and perhaps overheating?) UK consumer sector. CaixaBank is also buying the rest of Banco BPI in neighbouring Portugal for US$1.2bn to take proper control, while BBVA sold its stake in China’s CITIC Bank for US$1.7bn.
MUCH BUSIER HAS been the flow of portfolio trades out of deleveraging and re-strategising banks. Mizuho’s acquisition of US$36.5bn of North American loan commitments and US$3.2bn of drawn facilities from RBS for US$3bn was a fabulous trade for the Japanese mega-bank as the access it gained to 200 high-grade US and Canadian names will drive some very profitable cross-sell.
This is a strategy the Japanese mega commercial banks have been utilising to great effect throughout the entire post financial crisis period in Europe and the US and which will stand them in good stead as the cycle turns positive. At the same time, they haven’t diverted their focus from building out in Asia as a home-territory play. SMBC acquired a 17.5% stake in Indonesia’s Bank BTPN from private equity firm TPG in January for US$462m in January, taking its holding in the bank to 40%.
For sure, I don’t see bank deals usurping activity in the painfully in-vogue TMT or healthcare sectors any time soon but you never know: year-on-year activity is up and my expectation at least is that the episodic turns more strategic as the year progresses.
