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 While these activist hedge funds have already targeted some major
financial companies, such as insurer American International Group
Inc and auto loan lender Ally Financial Inc., banks have
historically stayed out of their sights.
Activists launched 97 campaigns last year aimed at the U.S.
financial sector, around triple the amount from 2009, according to
Thomson Reuters Activism data. Of those campaigns, 22 were aimed at
banks, up from eight in 2009, the data show. The number has
increased every year since the 2008 financial crisis.
Hedge funds such as Ancora Advisors, Clover Partners and Seidman &
Associates are buying up stakes in lenders across the U.S., from
community banks to large regional lenders.
Driving these investments is the view that ultra-low interest rates,
lagging returns on equity and tough regulations will push more banks
to merge, with buyers willing to pay a hefty multiple to a bank's
tangible book value. Activist investors interviewed by Reuters say
another factor is exposure to energy-related loans, which is driving
down the valuations of certain banks and making them all the more
vulnerable to a takeover.
"Bigger banks are back in the market doing deals," said Ralph
MacDonald, a partner at law firm Jones Day, who specializes in
mergers and acquisitions.
U.S. bank mergers and acquisitions volume rose 58 percent last year
to $34.5 billion, according to Thomson Reuters data.
VULNERABLE TO AN APPROACH
Last week alone saw two mergers. Huntington Bancshares Inc said it
would acquire FirstMerit Corp for $3.4 billion in stock and cash,
combining two Ohio-based lenders. And Chemical Financial Corp. said
it was merging with Talmer Bancorp Inc. in an all-Michigan
transaction that will create a bank with $16 billion in assets.
To be sure, activists' bets on banks are not without risk -
especially if they get the timing wrong. The S&P 500 Financials
index is down 14 percent since mid-December on fears that the
Federal Reserve will take longer than previously expected to raise
interest rates, hurting banks' profitability. Another worry is that
oil prices drop further, making a bank’s energy loan book more of a
liability than an opportunity.
A takeout by a larger rival is also never a guarantee, but that is a
risk activists are willing to take.
On Monday, Hudson Executive Capital, a New York-based hedge fund,
announced it had acquired a $56 million stake in Dallas-based
Comerica Bank, a lender with $71 billion in assets under management.
Among the banks that could buy Comerica is North Carolina-based BB&T
Bank, according to activist investors who spoke to Reuters. David
White, a BB&T spokesman said the company does not comment on
speculation relating to mergers or acquisitions. Comerica declined
to comment.
Zions Bancorporation, a Salt Lake City lender with $60 billion in
assets, is another bank that activists said is vulnerable to an
approach. Zions did not return calls seeking comment.
Comerica's return on common equity is about 7 percent while Zions is
around 5 percent. That is also lower than other peers, potentially
opening up Zions to criticism that it isn't working its balance
sheet aggressively enough.
As lenders with more than $50 billion in assets, both banks are
labeled systemically important financial institutions (SIFIs),
meaning they are subjected to enhanced Federal Reserve supervision
and the central bank's annual stress tests. The SIFI label comes
with heavier compliance cost burdens that bank executives say hit
mid-sized banks harder than the largest institutions, which have the
scale to better absorb the cost.
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"For U.S. depositories, if you're trying to drive growth, how much
cost can you continue to cut?,” said Daniel Kerstein, a Barclays
investment banker who advises companies about activism and activist
campaigns. “Ultimately, you need scale to spread out your costs."
LOSS OF FUN
PL Capital, an activist hedge fund focused on the bank sector, is
raising a $200 million hedge fund that will target banks with up to
$50 billion in assets.
The firm believes that any bank earning a 12 percent or less return
on tangible common equity needs to consider whether it can prosper
as an independent institution, PL Capital co-founder Richard Lashley,
said in an interview.
A bank's exposure to falling energy prices makes it even more
vulnerable, he noted. But another key factor is a bank's ability to
maneuver through a climate where low rates are compressing net
interest margins, and stricter regulations are increasing costs.
"Management teams and boards are just exhausted," said Lashley, who
is based in New Jersey. "It's not fun to run a bank anymore."
The rich pickings that activists see in banks contrasts with a
drought for such opportunities that persisted for many years. After
the 2008 financial crisis, bank mergers ground to a halt. Banks
subsequently focused on cleaning up their own balance sheets and
implementing new regulations enforced by the Fed as part of the
Dodd-Frank legislative overhaul of the U.S. financial system.
Beginning around last year, bank deals perked up again, emboldening
activists.
"My phones are ringing off the hook with calls coming in from banks
wanting to sell," said Pat Hickman, the CEO of Happy State Bank, a
lender in the Texas panhandle. "And one of the primary reasons is
regulation."
Activist investors have traditionally steered clear of large Wall
Street banks, wary of their size, complexity and high level of
attention they earn from regulators and politicians. Still,
intervention by activist investors may not be entirely out of the
question in the future.
Mike Mayo, managing director of brokerage firm CLSA and a veteran
banking analyst, last week hinted that frustrated stock owners were
a factor behind his decision to upgrade his rating of Bank of
America's stock.
"While an activist is an outside shot, increased shareholder
pressure seems likely," Mayo said in his Jan. 29 note.
(Additional reporting by Dan Freed in New York; Editing by Greg
Roumeliotis and Martin Howell)
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