Bank M&A: Will FinReg Light a Fuse?

Bank analyst Richard Bove expects financial reform to spark a wave of consolidation among the smaller U.S. banks.
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) -- Financial reform meant to provide relief and opportunity for small banks and shrink large banks will actually foster a wave of consolidation in the industry, according to bank stock analyst Dick Bove.

The role of taking issue with government policy is a familiar one for Rochdale Securities's Bove, who told clients in a research note Wednesday that Congress is contradicting itself on reform when it comes to the small banks.

"If the regulators do what Congress has mandated, the new law will drive these companies to sell their businesses or simply fail," Bove says. "It is creating a significant opportunity for bank acquirers to buy small banks at distressed prices

and forming accretive deals."

Bove's primary concern centers around eliminating trust preferred securities -- a primary source of funding for small banks -- as a legitimate capital source. Small banks will have to look elsewhere for capital sources as existing trust preferred securities mature, he writes.

Trust-Preferred Securities: A "Tantalizing" Opportunity>>

But Bove also has a problem with the new annual stress tests meant for banks with less than $50 billion in assets.

It will likely have "very stringent requirements concerning commercial real estate," Bove writes. "This will hit the smaller banks hard since they tend to be relatively larger lenders to this part of the economy than to, say, consumers or businesses."

Bove believes smaller banks could get squeezed since they will be phasing out the use of trust preferred securities in their capital ratios, even as the standards are going up.

"The small banks will not get the money they need," he says. "If I am wrong and they do get the money it will dilute the ownership position of the current holders of the stocks. These owners are far more likely to want to sell their stock than sit back and be diluted."

Banks facing this choice will fuel the next round of M&A, Bove believes.

The large money-center banks like

Bank of America

(BAC) - Get Report


JPMorgan Chase

(JPM) - Get Report

will likely sit this round of M&A out though, since they are seen by regulators as already being too big.


(C) - Get Report

for one has already said it plans to concentrate on its regional consumer business outside of the U.S. It is not looking to expand domestically, other than a few key U.S. cities.

Instead the next wave of buyers will be the so-called super regional banks, such as

U.S. Bancorp (USB) - Get Report



(BBT) - Get Report


PNC Financial Services

(PNC) - Get Report

, as well as mid-size banks such as

First Horizon

(FHN) - Get Report


U.S. Bancorp and First Horizon have spoken of their desire to take advantage of the increasing dislocation amongst small banks as a result of the continued struggling economy and financial reform.

"With many banks seeking to sell at the same time, a buyers' market will develop," Bove says. "The big banks will get accretive deals and they will get bigger. The small banks will continue to fade away."

--Written by Laurie Kulikowski in New York.

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