Europe's debt crisis tops a long list of worries stifling U.S. banks' merger ambitions, some high-profile dealmakers said on Tuesday.
Mergers between large U.S. lenders will remain rare until European leaders deliver a plan to resolve the region's debt crisis and restore confidence to global debt and equity markets, a handful of private equity and investment banking experts said at the Bloomberg Dealmakers Summit in New York.
"I do think it is a moment everywhere — including in America — to worry about Europe," Christopher Flowers, founder of private equity firm J.C. Flowers & Co., said, adding that a default of Greece or other debt-plagued nations could create a bigger financial meltdown than the 2008 crisis.
Sovereign debt is the most pressing of several uncertainties that have all but killed the momentum in big-time bank M&A that had begun last year, he and other speakers said. Among the worries: bankers are waiting on final capital standards while watching whether regulators approve Capital One Financial Corp.'s $9 billion purchase of ING Groep NV's online U.S. bank. Critics, in public hearings that resumed Tuesday, have complained the deal would create another too-big-to-fail bank.
H. Rodgin Cohen, senior chairman of the law firm Sullivan & Cromwell LLP in New York, is an adviser in Capital One/ING transaction. The Federal Reserve's decision may determine whether other midsize banks can make big strategic moves, he said in a separate presentation at the conference. At the least, it may mean that banks can expect a longer approval process for big deals.
"I definitely think it will be approved," Cohen said.
Banks are also waiting to find out how much extra capital must be set aside by the largest banks deemed a potential threat to financial stability. If that is the case, some lenders may "never" be able to justify a deal where added-scale requires increased capital reserves, he said. In other words, the burden of higher capital levels may exceed deal returns.
Jonathan Pruzan, managing director and co-head of global financial institutions at Morgan Stanley, said bankers are deeply reluctant to sell the franchise in a down market. The 200-plus banks that sold for more than $100 million from 2004 to 2006 fetched on average more than three times their tangible book value. That figure fell 50% in the 25 bank deals worth $100 million or more in the last three years.
"We don't see much activity based on the combination of uncertainty and low valuations," Pruzan said.
The three speakers were bullish on the long-term health and stability of the U.S. banking system because U.S. banks have a lot more liquidity and capital than they did four years ago.
P. Oliver Sarkozy, managing director and head of global financial services for the New York private equity firm Carlyle Group, said a merger wave among U.S. banks is inevitable because the country has too many banks and their services are commodities.
The timing depends on two things, he said: Europe's debt woes easing and U.S. interests rising back to normal levels. Europeans still seem to be a "long ways off" from devising a credible plan, he said.
He said the turmoil is not entirely bad for Carlyle. Global banks are putting up for sale ever increasing amounts of assets, he said. Also, merger activity should accelerate swiftly as soon as confidence is restored to the system.
"It's kind of like waiting for Godot," he said. "The longer you wait for him the bigger he's going to be when he shows up."
