NEW YORK (Reuters) - Investment bankers, traditionally an optimistic lot, struck a dour note on bank deals in the near future, describing their outlook with words rarely heard spoken publicly in these circles -- “bleak,” “skeptical,” “really quiet.”
Volatile markets, sinking bank stocks, and an uncertain regulatory and economic environment have brought bank deals to a grinding halt at a time when the need for mergers is great, financial services bankers and lawyers said on Tuesday.
“Our current read of activity is that it’s really quiet,” said Fernando Rivas, JPMorgan Chase & Co’s (JPM.N) co-head of North America financial institutions group, speaking at the SNL Bank M&A Symposium in New York.
Andrew Senchak, KBW Inc’s KBW.N co-head of global financial institutions group, added: “I offer a pretty bleak assessment until certain aspects of the political reality get resolved.”
The downbeat sentiment comes after a somewhat better start to 2011. The first half of the year saw a handful of large transactions such as Capital One Financial Corp’s (COF.N) $9 billion deal to buy ING Groep’s ING.AS U.S. online bank, and PNC Financial Services Group Inc’s (PNC.N) $3.6 billion purchase of Royal Bank of Canada’s (RY.TO) U.S. retail bank operations.
U.S. M&A involving banks has totaled $29.2 billion so far this year, more than double the $11.5 billion at the same time last year, according to Thomson Reuters data.
But these numbers are still far below the activity seen in previous years. In 2007, for example, the U.S. banking sector saw $68.8 billion worth of deals for the entire year, the data shows.
Things could get worse. The U.S. Federal Reserve is examining Capital One’s bid for ING Direct USA in a move that observers are characterizing as a test case for how the U.S. government will view big-bank mergers.
Some other banks are seeing that decision as a warning that such transactions will be subject to more scrutiny.
“If the CapOne application were denied that warning shot would become a nuclear weapon against acquisitions,” said Rodgin Cohen, senior chairman of law firm Sullivan & Cromwell, which was one of the advisers on the deal.
Deals are not only important for investment bankers and their firms, but they can also help weed out some of the zombie institutions that are stumbling along but making few new loans.
M&A, however, is only one part of fixing a banking system that has many broken parts. A lot ails banks these days.
A low interest rate environment is squeezing profitability, a weak economy is hurting loan demand, regulation is curtailing sources of revenue such as fees, increased capital requirements are slashing returns, and compliance costs are going up.
The KBW Banks index .BKX has fallen some 28 percent since August. Bankers said they expected bank earnings to fall further as these pressures play out.
Deal advisers said the need for bank M&A had never been greater. Mergers can help banks cut costs and grow.
“There is no need to follow a Noah’s Ark approach in a merger and having two of everything,” said Cohen, a long-time adviser to some of the largest banks.
“There can often be a chance to increase revenues if the acquirers products and services are superior to those of the target,” he said.
In the near term deals are likely to involve pools of assets to drive balance sheet growth and mergers with low takeover premiums, bankers said.
One bright spot for deal advisers is the low end of the spectrum, where community banks are weighing M&A as they grapple with problems such as board fatigue, access to capital and lack of earnings visibility.
“This is the ground from which M&A activity will spring over the foreseeable future,” said Brian Sterling, co-head of investment banking at Sandler O‘Neill Partners.
Editing by Bernard Orr