Big Banks for Sale: A Buyer's Market or Dilemma?

Implications: A number of large banks are looking at severely depressed stock prices and multiples that have dropped to book value or below. Is now the time for a buyer to step up and buy a struggling bank? If not, when does it make sense for a buyer to cut a deal? Will existing M & A deals still close? What will be the impact on other market players and suppliers?

Analysis: The banking industry recorded a decline, believed to be a first, in the number of commercial & retail bank and thrift entities with more than $10 billion in assets. This large institution class has been driving industry consolidation since the 1980s with successive waves of deals combined with organic growth at smaller regional banks.

1. Excess capacity still exists in the banking and thrift segments, so further consolidation will happen. Geographical markets that provided for most of the organic growth over the past five years are in a state of turmoil. Banks with exposure in these markets may find themselves as bottom fishing targets.

2. The list of big bank buyers is not deep. JP Morgan, Wells Fargo and US Bancorp are the best positioned domestic buyers. Several global players with US franchises are possible buyers if the target's franchise fits the long term expansion plans.

3. The class of target's expands with each quarter's results. Three primary problems link the fortunes of these institutions: mortgage credit related losses; sluggish home markets; and overbuilt market exposure. The list includes Washington Mutual, National City, First Horizon, and IndyMac Bank.

4. Buyers are likely to become more active when they sense the uncertainties and potential problems have reached a tipping point and begin diminishing. Odds favor the buyers waiting for each quarter's results.

5. Current deals in the pipeline, particularly B of A - Countrywide, are being watched closely. That deal has many moving parts and, if a new, smoking gun issue surfaces, could fall apart.

6. FinTech suppliers have to be careful. Yesterday's big outsourcing win could be tomorrow's early termination fee. Replacing recently hard won new sources of revenues is both frustrating and challenging.