American political humorist Will Rogers once famously advised an audience, “Buy land. They ain’t making any more of the stuff.” While that advice sounds a little quaint in the wake of the popped housing bubble, it might be said of banks today. Over the last two years, not a single new bank has been chartered by the Federal Deposit Insurance Corporation (FDIC), while over that same period of time FDIC regulators have shut or forced the takeover of nearly 200 failing banks.
Yet while analysts have been predicting a big wave of consolidation in the industry for two years now, so far the waters have been calm. Pre-crisis, in the 2000-2006 period, whole bank acquisitions were averaging close to 300 per year, with the deal values averaging a total of $100 billion a year, but in since 2010, they’ve been closer to 50 acquisitions totaling about $10 billion annually. This has left people wondering, “Will 2013 be the year?”
“I think we’ll see more M&A in the banking industry this year than last,” says Erik Oja, banking analyst with S&P Capital IQ. “But I don’t think it will be a huge increase. Maybe 75 deals involving maybe $15 billion in assets.”
“The banking space is definitely going to get smaller,” predicts Robert Bolton, president of Rochester, NY-based Iron Bay Capital, which runs a long-short fund that invests exclusively in financial institution stocks. “You’ve got a lot of things that argue for consolidation,” he explains. “There’s tougher regulation, after a recent history of regulators sleeping at the switch. And you’ve got a lot of banks under pressure from a continued lack of new loan business.”
Bolton argues that eventually the US banking industry will see a lot of merger activity, both cases of “mergers of equals,” and of regional banks buying up smaller community banks. But he can’t say when that will start to happen.
“You’ll also see the big banks selling their poorer performing units, which makes business sense,” he says.
Amy Sullivan, an analyst with Mendon Capital Advisors Corp., also in Rochester, agrees. “People were expecting 2012 to be a big year for bank mergers,” she says, “but it didn’t happen. “I think bank owners were waiting to see what the outcome of the presidential election would be. Now that that’s out of the way, you may see it start to happen.”
On the one hand, suggests Andrew E. Boord, an analyst with Fenimore Asset Management, there are a lot of private bank owners and board members who “are just worn out from the last few years, and who are saying, ‘We’re done! Let’s sell this thing!’ The trouble is, they are remembering what their banks were worth back in 2006 and 2007, and they’re not happy with the price they can get now.”
He suggests that these bank owners may try for a while to rebuild their lending business and build up their fee income in hopes of boosting their banks’ price, but he says, “That’s hard to do, so eventually I think you’ll see them starting to accept reality and sell.”
Sullivan predicts that bank M&A activity will stay on hold at least until Congress has dealt with the next debt ceiling limit crisis, probably sometime in March. “Then in the second and third quarters, as bank owners realize they’re not going to be able to generate any loan growth, you could start to see some real action,” she says.
“We’re not going to see a return to 1998,” predicts Boord, “but bank M&A activity is going to pick up.”
What all this means for the financial advisors in the bank channel is not so clear.
Fewer banks and fewer branches, on its face, would seem to mean fewer positions for advisors. And when banks merge—particularly when two regional banks merge that have overlapping service areas—clearly some competing advisors will have to be let go.
On the other hand, for those who have solid books at solid banks, losing the competition is a good thing.
But it’s also not clear that the tight margins in the mortgage business and the paucity of new lending are bad for the advisory business. As Boord explains, “If you’re a bank and your loan business is flat, one thing you will probably want to do is work on growing your fee business, and that would include your investment program. So you will probably see bankers hiring more financial advisors and making more resources available to them. Senior bank managers are looking much more favorably than they used to on operations that will generate fees for the bank.”
Sullivan agrees. “A lot of the banking management people we’ve sat down with are reappraising their wealth management and advisory businesses, looking for more fee income. Also their insurance business. They don’t want to be so dependent upon loan growth. It will be a better time for financial advisors, for sure, with more resources and with better deals when they are hired.”
Earlier this year, Kehrer Saltzman Associates, a research firm that studies the financial advisory industry, found that during 2010 and 2011, even as the number of banks partnering with a third-party marketing firm to run their financial advisory business declined because of mergers from 2,958 to 2,760, the percentage of banks offering investment services by one of the 12 largest TPMs actually rose slightly from 24.8% to 24.9%.
With the focus on trying to build fee income, Steve Saltzman, a managing principal at the research firm Kehrer Saltzman Associates says, “I think you’ll only see advisors losing their positions where branches are closed because of overlapping jurisdictions.”
In any event, there’s plenty of room for the advisory business to expand, even if the number of banks does start to shrink seriously in 2013 through mergers and acquisitions. According to the Kehrer Saltzman study, 75% of financial institutions in the country still have no investment program.
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