A “seller’s market” for banks is shaping up in Arizona according to a new report by industry advisor Invictus Consulting Group LLC. Invictus says that 13 Arizona banks have too little capital and must or should sell, but that there is sufficient “Free Capital” among potential in-state buyers to make acquisitions.
“Free Capital is the chief measurement among regulators of a bank’s capability to pursue strategies to increase returns or grow, and it fortunately is sufficiently available in Arizona,” says Kamal Mustafa, Invictus founder and CEO, and a former head of M&A at Citibank.
Free Capital represents the difference between a bank’s current capital and its stress tested capital, as measured by the institution’s ability to survive a potential distressed economy over the next two years. Regulators will not approve strategic initiatives without a bank demonstrating sufficient Free Capital, regardless of the likelihood of a recession.
Invictus performs quarterly capital adequacy tests on the nation’s 7,000-plus banks. Regarding Arizona banks, it found:
13, with low capital, low net interest margins and poor profitability that must or should sell. Invictus estimates the aggregate investment required to purchase these banks, after taking into account their post-stress position, at approximately $228 million.
13, with low returns but having $213 million in Free Capital. They are firms that must or should buy, and might be expected to seek acquisitions to improve growth and profitability.
4, with satisfactory returns and capital, are “wildcards.” They don’t have to sell or buy, but could consider acquisitions. They have Free Capital of approximately $62 million.
As a result, together — banks that should/must buy and those that don’t need to do anything — Arizona banks have Free Capital totaling $275 million, or roughly 120% of the amount needed to acquire the must/should sell banks.
“Arizona has satisfactory in-state purchase capacity, as measured by Free Capital and relative to local banking industry needs, and is in much better shape than the national picture” says Mr. Mustafa. “As a rule, mergers among in-state banks generally offer the best opportunity for cost savings, and while Arizona banks could also turn to out-of-state buyers, they can be expected to make only modest bids. Consequently, Arizona banks considering a sale should do so now while the market is agreeable.”
”Buyers and Bleeders”
The report, titled “Buyers and Bleeders,” is an offshoot of Invictus’s quarterly stress testing review of 7,000 plus banks within the US, and is focused on identifying institutions that have limited expansion options in the present regulatory and market conditions. Today, banks across the country are facing increased regulatory capital requirements, declining net interest margins and increased competition, leaving many with little prospect for organic growth, part of the reason for expectations of a wave of M&A activity in the banking community. The Invictus report separates them as:
· “Buyers,” or those banks with low returns and excess capital, for which acquisitions are the principal option to increase size and returns.
· “Bleeders,” or banks with limited capital and low returns. Barring unique capital-raising solutions, their relative performance and valuation will continue to deteriorate over time.
Invictus Approach in Line with Regulators
Invictus uses methodology similar to the stress testing requirements of the Comprehensive Capital Analysis and Review (CCAR) and Capital Plan and Review (CapPR) processes, and Dodd-Frank Act and Basel III. As those programs have demonstrated, a bank’s Free Capital as determined under severely adverse stress is the single greatest measure of its ability to reward shareholders, determine expansion strategy and achieve long-term viability.
The public version of the report can be accessed on www.invictusgrp.com. The report details the potential numbers of buyers and sellers and asset levels by state and regions, but not by individual names, and is not intended to be a comprehensive review of present or expected mergers and acquisitions activities in the marketplace.
Invictus clients, which include banks, hedge funds and investment banks, can access the detailed data upon which the report was based. Invictus can also perform custom analysis, screening and sorting of potential buyers and sellers on a geographic basis, and can calculate a potential acquisition’s impact to the buyer’s stressed tested earnings and capital levels.