The downgraded Euro holding companies would not be "forced sellers," since they all have excess capital, according to Bank of America Merrill Lynch analyst Erika Penala, who said in a report on Tuesday that the European holding companies "would only part with their US franchises on attractive terms."
While it would be a pretty obvious play for European holding companies to shore up their capital by selling their strongly capitalized U.S. subsidiaries, Basel III rules may require banks "to fulfill liquidity requirements in a currency by currency basis, which would put a premium on U.S. denominated deposits for European banks," Penala said.
Investors have seen several large recent deals involving U.S. subsidiaries of foreign holding companies, including Capital One's (COF - Get Report) purchase of ING Direct (USA) from ING Groep (ING) in February for roughly $9 billion in cash and stock, which was followed on May 1 by the purchase of HSBC's $30 billion U.S. credit card portfolio for a premium of $2.6 billion.On Friday, First Niagara Financial Group (FNFG - Get Report) of Buffalo, N.Y., expects to complete its purchase of roughly 200 HSBC branches, in a complicated deal that has included the sale of roughly 100 branches by First Niagara. Leaving aside foreign-owned U.S. banks held by non-European companies and HSBC, here are the four largest U.S.-based foreign subsidiaries that could be on the block:
- RBS Citizens, NA of Providence, R.I., is a subsidiary of Citizens Financial Group, which in turn is held by Royal Bank of Scotland Group PLC (RBS). The U.S. bank subsidiary had $106.9 billion in total assets, with over 1,500 branches in 12 states, while the U.S. holding company has roughly $132 billion in assets. RBS Citizens, NA was strongly capitalized as of March 31, with a Tier 1 leverage ratio of 10.09% and a total risk-based capital ratio of 13.09%, according to data supplied by Thomson Reuters Bank insight. These ratios need to be at least 5% and 10%, respectively, for most U.S. banks to be considered well-capitalized by regulators. Among the four banks listed here, "a sale of Citizens to a US regional bank appears to be the least likely," according to Penala, because of the size of the bank and what might be an "unattractive" price for RBS.
- Sovereign Bank, NA of Wilmington, Del., is a subsidiary of Santander Holdings USA, which in turn is held by Banco Santander, SA (STD). The U.S. subsidiary bank had $78.2 billion in total assets as of March 31, with a Tier 1 leverage ratio of 11.15% and a total risk-based capital ratio of 16.45%. Penala said that a deal for Sovereign "would give an acquirer a sizeable presence in the Northeast, given the bank's number three market share in Massachusetts, number four market share in Pennsylvania and number seven market share in New Jersey."
- Compass Bank of Birmingham, Ala., is a subsidiary of BBVA Compass Bancshares, which in turn is held by Banco Bilbao Vizcaya Argentaria, SA (BBVA). The U.S. bank subsidiary had $63.1 billion in total assets as of March 31, with a fourth-place deposit market share in Texas, which Penala said "may be the most coveted asset" of the four U.S. subsidiary banks listed here. Compass Bank had a Tier 1 leverage ratio of 8.83% as of March 31, with a total risk-based capital ratio of 14.24%.
- Bank of the West of San Francisco is a subsidiary of BancWest Corp., which in turn is held by BNP Paribas SA. Bank of the West had $$62.4 billion in total assets as of March 31, with a Tier 1 leverage ratio of 11.57% and a total risk-based capital ratio of 15.45%.