Besides the Fed’s pause (vs. an end) in Fed Funds rate increases, news this week points to early signs of consolidation in banking. It’s never one thing but a combination of factors that align market conditions to a trend. And if you’re considering M&A as part of your strategy, to quote Bill Gurley “The time to eat the hors d’oeuvres is when they’re being passed.” So with that, on with the news.
1. ‘Do You Even Want Us to Exist?’ A Bank Chief Fights to Survive
This is a must read from Rob Copeland at the NYT. He talks to Western Alliance’s chief Ken Vecchione on the delicate situation regional banks face.
Every quarter for the past several years, Ken Vecchione printed out a spreadsheet comparing the growth of the bank he runs, Western Alliance, with its three principal competitors: First Republic, Signature Bank and Silicon Valley Bank.
And each time, Mr. Vecchione was annoyed because the analysis would show that Western Alliance’s loans and deposits were growing similarly to the others — its total assets tripled in five years — but its stock price wasn’t soaring as high.
In addition to valuation woes, Western Alliance had to open the kimono for large depositors to calm fears in 1Q.
The bleeding stopped only after the bank offered some major depositors a look inside its operations in exchange for signing nondisclosure arrangements. Some took up on the offer.
“I feel for the depositors — they didn’t sign up to be bank equity analysts,” Mr. Gibbons said.
This stress has been overshadowed by an apparent change in what regulators think a stable banking market should look like.
Government officials can’t seem to decide what they want banks like Western Alliance to do. Since the 2008 financial crisis, policymakers have put the brakes on “too big to fail” institutions, saying they would prefer risk to be distributed more evenly across lenders. Now, though, there is skepticism about the grow-at-all-costs ambitions of smaller banks, and hints of an openness to mergers between lenders.
In a private meeting last month with bank chiefs, including Jamie Dimon of JPMorgan, Treasury Secretary Janet L. Yellen said she would welcome more lenders merging with one another, according to a person who participated in the briefing, in part because it would make it easier for regulators to conduct oversight.
2. ‘There will be many fewer banks’: The return of Meredith Whitney
At the same time, former lauded banking analyst Meredith Whitney has hung out her shingle again. Stephen Gandel of the FT writes:
Meredith Whitney, once dubbed “The Oracle of Wall Street” for predicting the Great Financial Crisis, is relaunching her firm at a time when she predicts that, once again, a large number of banks may disappear.
And the driving thesis in her move is the weakness in banking valuation, potentially making acquisition targets more accessible.
Headwinds, including the US housing market and new bank regulation, will make it increasingly hard for many regional banks to survive on their own. This will weigh on their stock prices and make them attractive acquisition targets.
Whitney predicts a wave of mergers that will cull the ranks of midsized lenders, especially in areas of the country like Texas that are continuing to show economic growth.
However, she’s more confident that we’re past any more major institution failures.
She also thinks the regional banking crisis is over, even if the economics are still stacked against many smaller institutions. “Silicon Valley Bank and the others that have failed — I look at those as unforced errors,” said Whitney. “The banks reported decent first-quarter earnings and the market is not telling you that other banks have made similar mistakes.”