Bank Deals Won't Come at Any Price
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By DAVID REILLY / WSJ / Jan 6, 2011
Bank-stock investors may be counting merger gains before they have hatched.
Since mid-December, the KBW Bank stock index has risen 9%, while individual shares such as Regions Financial, Zions Bancorp or SunTrust Banks have seen double-digit increases. That compares with a rise for the S&P 500 of 3%.
The gains come partly on the back of Bank of Montreal's Dec. 17 deal to acquire Marshall & Isley and the Dec. 22 news that Hancock Holding would acquire Whitney Holding. The deals suggested the arrival of a long-awaited wave of regional- and midsized bank M&A. Even better, the M&I purchase price was at a 33% premium to the previous day's close, while Whitney was announced at a 42% premium.
Yet the run-up in bank shares means there is less room for similar premiums. And while there is no telling what a determined acquirer may pay, legacy loan losses and the need to repay Troubled Asset Relief Program funds make valuations look even richer.
Consider Regions. Its stock trades at around 1.15 times tangible book value. That is already above the one times tangible book that Bank of Montreal is said to be paying for M&I. Although some analysts believe purchases at 1.5 times tangible book are possible, any acquirer has to take into account the market value of a bank's loan book. This is often different from the carrying value of loans. Bank of Montreal, for example, said it will mark down M&I's loans by 12%.
Regions said in its third-quarter securities filing that the market value of its loans was about $10 billion less than their carrying value. Adjusting assets and equity to reflect this, and tax affecting the difference, reduces tangible common equity to about $1 billion, against $7.6 billion at the end of the third quarter. So buying Regions at the current price would arguably cost about 8.5 times tangible book.
Regions has an attractive regional footprint in the southeastern U.S. and a strong deposit base. It is "a kind of a 'sitting duck' for a larger bank to acquire," Miller Tabak analyst Tom Mitchell noted in a report earlier this week, but its troubled loan book would be "a potential 'poison pill'."
At SunTrust, trading at about 1.3 times tangible book, adjusting the loan book sends the valuation to nearly 2 times. For Fifth Third Bancorp, also a possible buyout candidate, the multiple rises to 2 times from 1.6 times.
Then there is TARP, which Regions, Fifth Third, Zions and SunTrust would need to repay. That can help offset merger synergies and raise the apparent multiples further if viewed as a necessary part of any deal.
True, beauty is often in the eye of an acquisitive beholder. But valuations may prove high for even a smitten admirer. |
