Thursday, December 22, 2005

RBC Expects US Bank and Thrift M&A Activity to Accelerate in 2006

SNL Financial LC, 22 December 2005

RBC Capital Markets' commercial banking research team delivered its forecast for M&A activity in 2006, saying that they expect activity to pick up after a slow 2005 because of the "completion of the 'digestion phase' of the acquisition cycle for selected acquirers," a coming slowdown in earnings growth and regulatory burdens starting to ease.

RBC noted that based on M&A activity through mid-December, they expect the number of banks acquired this year to fall 9.7% year over year and the total assets of sellers to drop significantly to an estimated $137 billion. That would represent a 78% decrease, the analysts said, demonstrating that the majority of sellers in 2005 were small banks.

The tide could be turning, the analysts said, as regulatory burdens such as the heightened enforcement of the Bank Secrecy Act, the Patriot Act and other regulation ease and enable more M&A activity. More M&A activity could also come from CEOs having less "fun" in their jobs, RBC said. The analysts noted that banks are sold and not bought, and as earnings growth slows and in some cases earnings decline, CEOs may have less fun in their jobs than in the recent past.

"Therefore, increased merger and acquisition activity could result from this unhappiness," the research team said in a report.

Additionally, RBC noted that sellers are still fetching attractive prices and that minimal stock-price penalization for dilutive deals exists, thereby further supporting increased M&A activity.

"The minimal penalty for announcing and completing a dilutive deal suggests to us that acquirers will continue to price deals at high prices. As a result, as potential sellers realize that managing a bank is not as much 'fun' as it used to be, selected banks may look to capitalize on the expected strong pricing levels in 2006," the research team said in the report.

RBC said that Astoria Financial Corp. ($22.6 billion), BankUnited Financial Corp. ($10.7 billion), CoBiz Inc. ($1.9 billion), Franklin Bank Corp. ($4.5 billion), Interchange Financial Services Corp. ($1.6 billion), Greater Bay Bancorp ($7.1 billion) and Valley National Bancorp ($12.5 billion) should be considered possible takeover targets over the next 12 to 24 months.

Among the firm's large-cap universe, RBC said that KeyCorp ($92.3 billion), U.S. Bancorp ($206.9 billion) and PNC Financial Services Group Inc. ($93.2 billion) could be considered as merger-of-equals partners or involved in no- or low-premium deals.

RBC said last May that Astoria, BankUnited, CoBiz, Franklin, Greater Bay, KeyCorp and PNC all could be possible sellers. At that time, the firm also named a handful of potential targets that did actually sell, including Gold Banc Corp. Inc., which inked an agreement to sell to Marshall & Ilsley Corp., Hudson United Bancorp, which sold to TD Banknorth Inc., and Independence Community Bank Corp., which handed over its reins to Sovereign Bancorp Inc.