Big Bank Chiefs Bearish on M&A

Banks hoping to sell themselves to their large rivals should stop holding their breath, according to the chief executives of three of the country's largest banks.

"Buyer beware," Richard Davis, the chairman and chief executive of U.S. Bancorp (USB), said at a banking conference Thursday.

Two other CEOs, PNC Financial Service Group's (PNC) William Demchak and Bank of America's (BAC) Brian Moynihan, concurred during the same panel discussion.

Moynihan showed a sense of humor about just how sour some big bank deals can turn. He has spent most of his tenure cleaning up the messes created by his predecessor, Ken Lewis, who bought Merrill Lynch and Countrywide as the banking industry collapsed into crisis.

"One of the things that makes my job easier than my predecessor's is that we can't acquire something," Moynihan said to laughter from the bankers attending The Clearing House's annual conference in Manhattan.

U.S. Bancorp, smaller than Bank of America and not yet near the government's cap on companies holding more than 10% of the country's deposits, has made some small acquisitions in recent months, including a deal announced Wednesday to buy an Irish hedge fund. U.S. Bancorp has also been described as the lead contender to buy the Chicago branches of Citizens Financial Group, which is owned by Royal Bank of Scotland.

But large, transformational purchases are "to be avoided" because of the uncertain regulatory and business environment, Davis said.

"In the old days you'd buy the bank and do due diligence on credit, and put a certain mark on top of that in case you're wrong. You can't really mark this. You have to take a limited view of what the risk is worth, and then you decide to take it or not. It's a buyer beware environment for sure," he added.

Davis predicted that it will be easier for banks to buy other companies "in a few years forward. … But in the meantime I think it's a very dangerous thing to do."

Moynihan, speaking after Davis, made another wry reference to the Countrywide acquisition that saddled Bank of America with a massive and imploding mortgage portfolio. "What Richard describes — you remember what happened to us. So we learned a lot about what was probably an unpredictable acquisition, for sure," he said.

Davis and Demchak have both expressed their suspicion of big purchases in the current environment, and Demchak reiterated his concerns on Thursday: "The inherent unknown value of what it is you're buying, because of the inability to mark the look-back risk or whatever else might be there, makes it pretty tough."

In an interview after the panel, Davis said that the government's stress-testing process has helped teach him what to look for in future acquisitions. But it is more difficult to figure out what past business practices, or lapses, bank sellers bring with them, he said.

"There are principles that will apply down the line where we can look at a bank with the skills that we're building now, so let's stress-test it forward," he said. "But the backward part — I haven't got an answer on when, but I know we'll get to a point where all of a sudden it seems that the pendulum has settled again and there's no dire need for municipalities or state [attorneys general] to go back and try to find someone or something wrong. … But until then, be very careful."