Volume 2, Issue 28, August 15, 2007
Tobias Moerschen CONSOLIDATION CONTINUES IN U.S. BANKING INDUSTRY
Analytical Coordinator The pace of consolidation in the U.S. banking sector appears to defy the law of gravity – mergers and
Assistant Vice President -
U.S. Financial Institutions acquisitions (M&A) continue at a brisk pace in spite of rising acquisition premiums, new bank formations
+1 212 806 3241 and – at least among larger banks – a diminishing supply of attractive targets. Since 2000, the number of
firstname.lastname@example.org commercial banks in the United States has shrunk to 7,380 from 8,315 – net of the approximately 1,030 new
Alan G. Reid
Managing Director –
banking charters established during the period, according to the Federal Deposit Insurance Corporation
U.S. Financial Institutions (FDIC).
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The short-term impact of the prevailing turmoil in the capital markets on M&A volumes is difficult to assess.
Chief Credit Officer – On the one hand, potential buyers may pause to protect their liquidity. On the other hand, potential sellers
U.S. Financial Institutions may be under increasing pressure to sell. In the longer term, however, DBRS expects consolidation to
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email@example.com continue at a pace similar to that of the previous years. If the current volume of M&A activity is an indicator
Brenda Lum, CA, CFA – 64 mergers announced and 39 new charters reported so far in 2007 through July – active consolidation in
Managing Director – the industry is likely to continue for the foreseeable future.
+1 416 597 7569 While mega-mergers, such as those between JPMorgan Chase & Co. and Bank One Corporation, and
between Bank of New York Company, Inc. (BoNY) and Mellon Financial Corp. (Mellon), receive much
Larry J. White
Managing Director – publicity, the great majority of acquisitions involve banks with assets less than $100 million. In fact, over the
Business Development past five years the universe of banks with assets less than $100 million has declined by nearly 1,300, net of
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firstname.lastname@example.org roughly 700 new bank formations in this size group.
Toronto Positive rating implications in most cases
DBRS Tower DBRS perceives that consolidation can have benefits for individual banks. Successful bank mergers typically
181 University Avenue
create – among other things – stronger franchises, more efficient operations, better economies of scale, more
Toronto, ON M5H 3M7 sustainable earnings and higher profitability. Consequently, investors benefit from holding the payment
+1 416 593 5577 obligations of a stronger company. For these reasons the rating implications of M&A are favorable in the
New York majority of cases.
New York, NY 10005 Only a few transactions are sufficiently large to have an immediate material impact on a bank’s credit
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fundamentals that requires rating action. In the majority of cases, DBRS takes note of the combined banks’
Chicago stronger credit fundamentals and improved future prospects without taking an explicit rating step. For
101 North Wacker Drive
Suite 100 instance, DBRS commented that the pending acquisition of First Indiana Corporation, with $2.1 billion in
Chicago, IL 60606 assets, by Marshall & Ilsley Corporation (M&I), with $57 billion in assets, represented an attractive long-
+1 312 332 3429
term investment for M&I, boosting its market share in Indianapolis, but was not of sufficient scope to
warrant positive rating action. By contrast, DBRS placed the ratings of Mellon Under Review with Positive
25 Copthall Avenue Implications following the announcement by Mellon and BoNY of their intent to merge. This rating reflected
London EC2R 7BP Mellon’s improved prospects by combining its businesses with the larger and financially more powerful
+44 (0)20 7562 5600
27, avenue de l’Opéra
75001 Paris Upward trend in cost of acquisitions may slow M&A activity
+33 (0)1 70 38 52 14 Except for the brief recession in 2002, the cost of acquisitions has been steadily rising on a nationwide basis
Frankfurt (Graph 1). The ratio of the price paid by acquirers to the book value of acquisitions has steadily increased to
Mainzer Landstrasse 16
a median of about 230% in July, 2007, up from about 175% in 2001 and 2002. The premium paid over core
60325 Frankfurt deposits (portion of the acquisition price in excess of tangible book value relative to the target’s core
+49 (0)69 97 168 144
deposits) has had the largest relative increase during this period, more than doubling to a median of 22%.
Price to trailing earnings over the twelve months preceding an acquisition has also risen steadily, albeit at a
slower rate than the other cost indicators.
Regional economic factors influence transaction volume and cost
Both the volume and cost of M&A activity are influenced by regional economic factors. Graph 2 shows that
transaction volumes in the Midwest and Southeast have remained at fairly high – and rising – levels, while
those in New England, the West, and Mid-Atlantic regions have been relatively low and less consistent.
Graph 3, showing the cost of acquisitions (Price/Book) by region, is helpful in understanding the different
Banks in the Midwest are struggling to maintain satisfactory earnings and growth rates because of the
region’s generally lackluster economic performance, higher than average unemployment rate and fierce
competition in a still crowded banking environment. Banks too small or too weak to expand into more
attractive regions seek to boost their competitive positions in the Midwest by buying or merging with others
in the region. The low cost of acquisitions reflects the weaker growth and profitability prospects of this
region relative to other areas. Low acquisition costs, in turn, also facilitate high regional M&A activity.
By contrast, M&A volume in the Southeast remains high in spite of the high costs involved. Both the
transaction volume and related high acquisition costs are fueled by the region’s attractive demographics and
positive long-term prospects. Above-average demographic and economic growth rates, densely populated
areas and high household incomes make this region the top choice for banks both already operating in the
region and those wishing to enter it.
Small acquirers stay close to home, large ones may go outside their footprint
The reasons for merging with or acquiring another bank vary greatly. Smaller banks with limited resources
typically engage in transactions within their current operating footprint to strengthen their branch networks
and deposit market shares, create a platform for future growth and improve profitability. These were the
principal drivers for the $8.6 billion Evansville, Indiana-based Old National Bancorp’s decision to acquire
the $490 million St. Joseph Capital Corp., based in Mishawak, Indiana (completed In October, 2006).
Acquisitions by or mergers between larger institutions are motivated by a broader set of objectives. Building
or strengthening the franchise in attractive markets within or outside the current footprint, cost benefits and
greater operating scale, and more stable earnings growth are just some of the many reasons that drive
transactions involving larger banks. Building a more powerful southeastern franchise drove the merger
between Regions Financial Corporation and AmSouth Bancorporation while strengthening its mid-Atlantic
market share led to PNC Financial Services Group, Inc.’s acquisition of Mercantile Bankshares Corporation.
For further information, please contact:
Senior Financial Analyst
U.S. Financial Institutions
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PRIOR NEWSLETTER ARTICLES
(Please click on each title to access the article)
Mortgage Turmoil Unlikely To Lead To Widespread Downgrades August 8, 2007
Big Five Canadian Banks Have Limited Subprime Exposure August 1, 2007
Q2 2007 U.S. Financial Institutions Earnings: Profits Grow Despite Rising Loan Loss July 25, 2007
Compensation and Benefits Dominate Bank Operating Expenses July 18, 2007
U.S. Financial Institutions Newsletters Q2 2007 July 11, 2007
U.S. Financial Institutions Newsletters Q1 2007 April 5, 2007
U.S. Financial Institutions Newsletters and Commentaries - Q4 2006 January 3, 2007
EUROPEAN BANKING WEEKLY ARTICLES
Compilation of European Banking Weekly – April to July 2007 July 18, 2007
OTHER DBRS NEWS
European Banks: Our Ratings Remain Well Positioned, but Significant New Challenges Are August 14, 2007
DBRS Comments on Liquidity of Rated German Banks August 13, 2007
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