The Deal: Banks Look to Sell Parts Rather Than Make Acquisitions

NEW YORK ( TheStreet) -- Wall Street banks are more likely to divest and sell parts of their operations than make any acquisitions as new regulations make it more expensive to be a large bank.

The prediction from dealmakers and advisers comes as new capital requirements loom and concern rises around creating institutions that are systemically risky or "too big to fail."

But that doesn't mean that the financial services sector will be moribund when it comes to dealmaking, with more small bank consolidation still on the horizon.

Plus, despite widespread retrenchments among Wall Street banks, opportunistic acquisitions in wealth management remain attractive, according to Eric Lohmeier a co-founder of midmarket investment bank NCP Inc.

Morgan Stanley is finishing its $4.7 billion acquisition of the remaining 35% of its wealth management venture with Citigroup Inc. after winning Federal Reserve approval, and Lohmeier said healthy margins and an aging demographic made the sector attractive.

"Banks are looking for stability in their revenues and wealth management has fairly decent profit margins," Lohmeier said.

The banking sector has seen sparse merger activity since the credit crisis, with only nine deals since 2010 with a deal value greater than $1 billion according to Deutsche Bank AG.

Among those deals were Capital One Financial Corp.'s 2011 acquisition of ING Direct USA for $9 billion and PNC Financial Services Group Inc.'s acquisition of RBC Bank for $3.45 billion that same year.

Jeff Davis, the head of financial institutions group at consultancy Mercer LLC, said there was the distinct possibility of Wall Street banks breaking up their operations.

"We've got an environment with a lot of pressure on margins and returns on equity with reduced trading volumes, where banks are handicapped by the Volcker Rule and management are taking a hard look at their operations," he said. " Large banks won't be acquirers of anything significant, certainly not depositories."

Davis said plausible scenarios included Chase Bank being spun out of JPMorgan Chase & Co., a hive-off of the JPMorgan's credit card portfolio or a Citigroup breakup of its commercial banking from its global bank and markets operations.

In addition, lenders including Bank of America Corp., SunTrust Banks Inc., KeyBank NA and PNC Bank NA all announced branch sales or closures in the first quarter of this year.

"I don't think it's preordained yet but there's a lot of pressure on returns," he said.

Deutsche analyst Matt O'Connor echoed the view that banks such as Bank of America, Citigroup, JPMorgan and Wells Fargo & Co. were likely too big to do large deals given regulatory and political views opposed big banks getting bigger.

"The next bucket of banks -- Capital One Financial Corp., PNC Financial services and U.S. Bancorp -- have done deals, but it's unclear if they still can," he told clients in a recent note.

Among the few banking deals done this year, regulatory concerns continue to hamper M&T Bank Corp.'s $3.7 billion acquisition of Hudson City Bancorp Inc.; those hitches reflect the Federal Reserve's concerns about M&T's anti-money laundering procedures rather than size or competition issues.

Federal Deposit Insurance Corp. chief economist Richard Brown agreed there was likely to be less consolidation among larger banks, noting higher costs imposed by Dodd-Frank.

But he noted more activity among players with assets of less than $1 billion -- with 142 mergers among this group in 2012, or twice the number in 2010. Many commentators have suggested the trend will continue as smaller banks seek economies of scale to offset a rising compliance burden.

Latham & Watkins LLP partner Stephen Wink said he had not come across any explicit reservations from regulators on major bank tie-ups.

"But folks talk about the 'too big to fail' concept, with the idea that these banks are already too big," he said.

Wink said merger activity among banks continued to be spotty, noting that the contrast between strong equity markets but still-soft economic data had made dealmakers cautious.

Written by Jane Searle in New York

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