This Day On The Street
Continue to site
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

The Deal: Too Big to Merge?

NEW YORK ( The Deal) -- Banks have been forced to re-think their approach to M&A as a wave of global regulation alters the appeal of deals and divestments. After three decades of consolidation -- epitomized by Bank of America Corp.'s acquisitive growth to transform itself into a national coast-to-coast universal bank -- a trifecta of economic weakness, regulatory uncertainty and shareholder aversion has produced a stagnant market for bank M&A.

Now, five years after the collapse of Lehman Brothers, new strictures are causing banks to think twice about whether the benefits of a transaction outweigh the cost, complexity and regulatory burdens of greater size or diversification.
[Read: <a target="blank" data-add-tracking="true" href=""><em>Will Twitter Sell Its Soul Like Facebook Did?</em></a>]

Lazard's managing director of financial institutions group James Spencer says the new requirements change how banks view risk and reward. "They will be a lot more shrewd in allocating capital and it will color how they view acquisitions," he says. "Investment banks have had to raise capital and sell their capital-intensive private equity businesses and assets -- we are seeing that trend play out. They're in the early innings of a long baseball game."

M&A statistics show global bank M&A at its lowest level since 2008, with 712 deals so far in 2013, only marginally up from 699 during the credit crisis. This compares to 788 deals in 2007, according to Dealogic, when aggregate deal value was nearly three times higher at $324 billion. Much of this stems from the continuing Eurozone crisis, which has led to serious difficulties for many European banks.

By contrast, the U.S. banking system appears to be recovering as M&A deals hit a three-year high of 279 -- roughly on par with 2010. Yet total deal value at $10.6 billion for the year to date is low by historical standards, particularly compared to $125 billion over the same period in 2004, when 212 deals were struck. The higher number but lower overall value of bank deals points toward a concentration of M&A activity among smaller banks less affected by new regulation.

For large banks, especially those deemed "systemically important financial institutions," or SIFIs, regulation targeted at reducing their systemic risk has stifled the prospect of significant acquisitions. U.S.-based SIFIs include Citigroup (C - Get Report), JPMorgan Chase (JPM - Get Report), Bank of America (BAC - Get Report), Goldman, Sachs (GS - Get Report), Morgan Stanley (MS - Get Report), Wells Fargo & Co. (WFC - Get Report) and State Street (STT).

Sandler O'Neill + Partners investment banking group principal Tom Killian points to so-called speed bumps or asset thresholds, which may cause banks to re-evaluate the merits of a deal if it brings additional regulatory and capital burdens. But he still expects active pockets of M&A between these hurdles, suggesting the $15 billion to $50 billion asset range will be an busy area for bank M&A.

The "speed bumps" occur at $500 million in assets, when banks become subject to Basel III capital ratios; $10 billion, when they must undergo Federal Deposit Insurance Corp. risk assessment and stress tests; $15 billion, when they lose the ability to grandfather trust preferred securities as Tier 1 Capital; $50 billion, when they become subject to detailed stress testing, financial reporting and potentially the Basel III liquidity coverage ratio; $250 billion, when banks are subject to the January 2014 adoption of Basel rules and stricter regulation (under Advanced Approaches rules); and lastly, when banks are deemed global SIFIs and must abide by a supplementary leverage ratio and the global SIFI capital buffer.

DLA Piper partner Michael Reed says banks are likely to be particularly cautious about deals that push them across the $10 billion asset threshold. But Lazard's Spencer says regulation alone is unlikely to kill deals that are otherwise based on sound fundamentals. "If it brings them over $10 billion in assets and it makes sense, they should still do it," he says.
[Read: <a target="blank" data-add-tracking="true" href=""><em>Why Wall Street Got Apple Wrong This Week</em></a>]

Both Killian and Reed say the supplementary leverage ratio is widely viewed by the banking industry as a punitive capital requirement for U.S.-based global SIFIs -- one that may force further divestments. This leverage ratio requires bank holding companies to have capital equal to 5% of their assets, while their federally insured banking units must retain capital equal to 6% of assets. Overall, banks must hold a far higher quality and quantity of capital compared to pre-credit crisis days.
1 of 3

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Real Money

More than 30 investing pros with skin in the game give you actionable insight and investment ideas.

Product Features:
  • Access to Jim Cramer's daily blog
  • Intraday commentary and news
  • Real-time trading forums
Only $49.95
14-Days Free
14-Days Free
BAC $14.11 0.43%
C $44.41 0.41%
GS $158.85 -0.43%
JPM $61.60 0.59%
MS $26.25 0.31%


Chart of I:DJI
DOW 17,740.63 +79.92 0.45%
S&P 500 2,057.14 +6.51 0.32%
NASDAQ 4,736.1550 +19.0610 0.40%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs