Activists take aim at muddling midsized banks
Dozens of regional lenders in the US, from People’s United of Bridgeport, Connecticut to Umpqua Holdings of Portland, Oregon, are at present making less than a 10 per cent return on equity. All should listen out for a knock on the door from PL Capital Advisors, a New Jersey-based activist determined to shake up a flabby and fragmented part of the banking sector.
PL, which made its name forcing change at small, community-focused banks, is about to launch a new fund to go after bigger targets, seeking to exploit disenchantment with feeble profits among institutional investors and a friendlier regulatory attitude toward mergers.
Other activists are preparing for battle, from Basswood Capital Management and Stillwell Value, both New York hedge funds, to Seidman & Associates of New Jersey.
Now that banks have steadied themselves after the crisis, there is a sense of “back to basics,” says Rich Lashley, one of PL’s two principals. “More and more [merger] discussions are going on behind the scenes. Everyone is trying to figure out if they are a buyer or a seller.”
Years of low growth, ultra-easy monetary policy and post-crisis regulations have squeezed profits for hundreds of American banks, forcing them to rely on cutting costs to improve margins. But many of the 1,156 publicly listed lenders are still posting returns well below their cost of capital, despite running down expenses as far as they will go. The obvious solution? Merge — or at least find very good reasons not to.
“Banks need to stop kidding themselves that [higher interest] rates are going to save them,” says Nathan Stovall, an analyst at SNL Financial. “Hope is not a strategy.”
Observers note that the backdrop for the activists has improved. Seven years on from the depths of the Lehman crisis, regulators still seem opposed to deals involving JPMorgan Chase, Citigroup or Bank of America, which remain under pressure to shrink and become less complex. But the banks beneath them appear to have a green light to get bigger.
One Wall Street dealmaker notes that BB&T of Winston-Salem, North Carolina, has done three chunky acquisitions in a little over a year. He concludes that the US Federal Reserve wants to see more “super-regional” lenders challenging US Bancorp, PNC Financial Services and Capital One beneath the top tier.
“If I’m [Daniel] Tarullo, I want ten of these guys, not three,” he says, referring to the Fed’s lead banking supervisor.
In one successful strike for activism, New York Community Bancorp agreed a $2bn deal in October with New York-based Astoria Financial. Astoria had been targeted by Basswood, which disclosed a 9.22 per cent stake in July and said it had requested a board seat. In its filing to the Securities and Exchange Commission, Basswood argued that Astoria had “substantial opportunities . . . to take steps to enhance shareholder value.”
More deals are beginning to flow. Since the end of September, New York’s M&T Bank was cleared to complete a $3.7bn merger with Hudson City, a regional rival, after a three-year wait, while KeyCorp of Cleveland announced a $4bn tie-up with Buffalo-based First Niagara.
First Niagara, a $39bn-in-assets bank which had achieved a double-digit ROE in just one of the past 20 years, is a “classic example” of the kind of subpar performer PL is planning to go after, according to Mr Lashley of PL. He says he aims to raise about $200m from rich individuals, and is ready to team up with other activist funds to increase his negotiating power.
Others on PL’s potential hit-list — between $5bn and $75bn in assets, and a single-digit ROE — include Comerica, a Dallas-based lender getting to grips with the oil slump, and Zions Bancorp, a Salt Lake City-based bank which the Fed judged to be short of capital last year. All told, that group of 79 lenders accounts for $1.18tn of assets, or about one-tenth of the listed US banking sector.
Activism in bank stocks poses particular challenges. Under the Bank Holding Company Act, no investor can accrue a stake of more than 10 per cent in a bank without first becoming a bank itself. That has encouraged fund managers to take small stakes in their targets, often appealing to managers behind closed doors rather than shaking fists in public.
“If you want to get honey you can’t kick over the beehive,” says Christopher Marinac, co-founder of FIG Partners, an Atlanta-based research and advisory boutique.
That is the modus operandi of Larry Seidman of Seidman & Associates, a Parsippany, New Jersey-based firm which has challenged dozens of bank management teams over the years.
Now that regulatory requirements have “dramatically increased,” he says, it is easier to make the case that executives need to consider radical action.
At these kind of size levels, in this kind of environment, “you’ve got to be really, really good to earn a decent ROE. And if you can’t, you have an obligation as a director to do something about it.”