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Bowing to pressure from community bankers, regulators extended the comment period on a set of proposals that will lift banks' minimum capital requirement to 7%.
August 8 -
SunTrust, Huntington, First Horizon and TCF would suffer the biggest drops in Tier 1 common equity under proposed guidelines, unless they change their mix of assets.
July 24
Proposed capital requirements from Basel III could douse more water on a mergers environment that is still trying to catch fire.
Heightened regulation usually induces weak banks to sell, but there is a growing belief that certain proposed rules in Basel III could hurt the valuations of some banks. And lower values could create an even greater divide between buyers and sellers during merger negotiations, industry observers say.
"People that expect pricing to get back to where it was in the 90s or early 2000s are going to be disappointed," says Ben Crabtree, a senior advisor at Oak Ridge Financial Services Group in Minneapolis. "Those who think they can get 2.5-times [tangible book value] when at the small end community banks are trading at 60% of book are just kidding themselves."
Certain proposals such as
"We model [Basel III] into any kind of forward-looking due diligence," says Scott Custer, the chief executive officer at Piedmont Community Bank Holdings, a Raleigh, N.C., company that aims to be a consolidator in North Carolina. "You can't hide the fact that it's coming."
A buyer's appetite "would depend on their perceived ability to raise additional capital," adds Custer, who once was the CEO of RBC Bank when it was owned by Royal Bank of Canada. "If they don't have that level of confidence, then they will harbor more capital."
As a result, the advancement of Basel III is leading some industry experts to wonder if the optimal time to sell a community bank has already passed.
"The problem is that there is going to be a whole stream of sellers" as the rules are implemented "and not a whole lot of buyers out there," Crabtree says. "We don't have a great number of banks buying right now, but I imagine it will get even worse when some of these issues come to head."
The median price-to-tangible-book value of bank deals in the last two years was 1.4, according to a KBW report issued Monday. The firm only looked at deals valued at more than $50 million. Just three of the 17 deals announced this year topped two-times tangible book value, and premiums have been falling as the year drags on.
Proposed rules for Basel III will "make [mergers] more difficult, but only in the seller's expectations," says Dan Bass, a managing partner at FBR Capital Markets.
One of the biggest constraints is a proposal requiring a "capital conservation buffer" of 2.5% in addition to the new minimum capital standards.
If a bank falls below that buffer, it is restricted from certain payouts including dividends, bonuses and share repurchases. This would especially stymie the ability for many small, privately held banks to raise capital because investors can find other industries that produce higher returns with fewer regulatory capital constraints.
"Were already challenged to deliver a run rate of return on equity that is acceptable to investors," Custer says. Basel III "just raised the bar on something that was already a challenge for the industry."
Still, Custer says that most of the bankers he talks to remain in a wait-and-see mode until the final rules are released. The
"My larger perspective is that Basel III, while a laudable concept, will be impossible to implement unless it is substantially modified," said Tom Lykos, the managing director of the private equity team at Commerce Street Capital, in an email.
"Its impact on M&A is so hypothetical that comments are no more than conjecture," added Lykos, who is a former counsel to the Senate Banking Committee and the House Energy & Commerce Committee.
Bass argues that, while it may delay deals as bankers wait for the final rule, Basel III will ultimately strike up consolidation activity. "It's just like another tile in a mosaic where there are all these issues, one after another, that are going to lead to consolidation," he says.
How much M&A activity, however, is debatable among bankers and industry observers.
"The real world appetite for acquisitions is lot less than the theoretical appetite for acquisitions," Crabtree says.
