Ripple Effects from Surging Bank Stocks
December 8, 2016 7:30 AM
The post-election rise in stock prices has been a boon for investors, but it is also causing notable changes for financial institutions. Here are a number of ways that the rally can help and hurt the banking industry.
A Chance to Raise Capital
The recent spike has given banks an opportunity to go out and raise capital for organic growth and acquisitions , or to satisfy regulatory orders . Since the election, at least 10 banks have announced plans to raise nearly $950 million, and many of those offerings were oversubscribed.
Window for PE Exits
Higher stock prices also provide an opportunity for big investors to cash out of their bank holdings. Private-equity investors in EverBank , First BanCorp in Puerto Rico and Brand Group have in the last month announced plans to pare their stakes or exit completely, possibly giving the banks a freer hand in running their operations.
Bounce in the Yield Curve
As the overall stock market rises, interest in bonds has waned, spurring big increases in yields. The 10-year Treasury rate, for instance, is up more than 50 basis points since the election. The result has been a steepening yield curve, which banks have been waiting for years to tap into.
Changing Bank Valuations
A lower appetite for bonds could also hurt the buying power of banks eager to use their stock to acquire other institutions, at least in the short term. That's because lower bond prices can lower a buyer's tangible book value, depending on the makeup of its securities portfolio, with bigger banks most likely to be hurt.
Higher Fee Income for Some
Banks with sizable asset management operations could enjoy a boost in fee income due to the bull market. A push to scale back regulation could provide a longer-term lift for those businesses.
Rethinking M&A
Not all stocks are appreciating at the same rate, which could change the metrics for some deals announced before the rally. PrivateBancorp just postponed a shareholder vote on its sale to CIBC due in part to an especially strong surge in its stock price. Prospective sellers with skyrocketing market valuations would have more standing to demand that suitors pay top dollar.
