Regional Banks: Dealmakers or Risk-Takers?
NEW YORK (TheStreet) - It's eat or be eaten for most regional banks these days.
While most of the headlines go to the four multinational money-center banks -- Citigroup (C), JPMorgan Chase (JPM), Bank of America (BAC) and Wells Fargo (WFC) -- and "super regional" banks names like U.S. Bancorp (USB), PNC Financial Services (PNC) and BB&T (BBT), the bulk of publicly traded U.S. banks operate on a much smaller scale and scope. Call them the modest majority. The asset size of these banks ranges widely from mid-cap banks such as Fifth Third Bancorp (FITB), Synovus (SNV), Zions Bank (ZION) and Valley National (VLY) to small-caps like East West Bancorp (EWBC), Sterling Bancshares (SBIB) or Umpqua Holdings (UMPQ).
And as the banking landscape changes, observers say these smaller players will need to carve out well-defined strategic niches for themselves and execute, or else prepare to be trampled down or gobbled up.
"If you're a smaller bank that's just kind of average, then what is in front of you is a very difficult environment where the market is demanding a lot of capital," says Gary Townsend, Hill-Townsend Capital, a private investment firm that focuses on bank stocks.
The new banking landscape of higher capital requirements and rising regulatory expenses could ultimately squeeze these banks more than their bigger brethren, who have sheer size and diversity on their side. In addition, the lesser regionals are still dealing with lingering credit costs and lower profits in general as the economy remains in a sluggish state.
Many banks "are still trying to work through a loan portfolio that's replete with nonperforming assets; regulators are banging at you daily and you're profitability is poor and prospects are murky. So I think the ability [for] smaller banks to earn anything like a reasonable return on capital is going to be very hard going forward," Townsend of Hill-Townsend Capital says.
For smaller banks, whereas once it may have been a cinch to get further capital from either private investors or the public markets, it is difficult to do so these days for the small banks.
"Although private investors may be interested, there is a lot more scrutiny in what they invest in and it's more of a challenge to get capital," says bank consultant Gregg Noonan, who primarily works with smaller banks with $1 billion to $10 billion assets. "Smaller community banks -- there are a lot of them and highly competitive and some of them have asset quality issues, so they're going to have to work through them and get their earnings back on track in order to get investors into their company."
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