John Kanas' Three Cs for Bank Survival

John Kanas, chief executive officer of BankUnited, sat down recently with American Banker's editor in chief, Neil Weinberg, to discuss his company's plans for the year ahead, the outlook for M&A and what bankers must do to survive and thrive in difficult times.

What do you see as the keys for Bank United to success in 2013?

JOHN KANAS: I think like most banks in a period like this there are several points that probably monopolize the conversation. One is capital. And the industry, as you know, has accumulated a lot of capital over the last four, five years, mostly as a result of a slow-down in growth.

The other thing is that BankUnited is arguably one of the more over-capitalized banks in the country. So we are building a storehouse of capital, hopefully to take advantage of what we may do with that in the near future. In addition, I think more than ever before having strong regulatory relationships is very important and a key to succeeding in this industry. We concentrate on that a lot at BankUnited. We are partners in a way with the FDIC as a result of the transaction we did in Florida in 2009. We guard that relationship carefully and we make sure to dot all the I's and cross all the T's in our relationships with them today.

You've mentioned that things are relatively good in South Florida, which may surprise some people.

Yes, actually it's been a remarkable comeback, especially in Miami-Dade and other parts of South Florida. Unfortunately that hasn't translated to the entire state. Generally speaking, the further north you go from Miami, and the further west you go from Miami, things have not progressed as far as they have in South Florida.

When we went there three and a half years ago there was a tremendous supply of excess condominiums. especially in the city of Miami. Thirty or forty thousand, according to some estimates, and they have been completely absorbed in the market. Real Estate values are actually rising again in South Florida. We're enjoying the times.

Is it just real estate, and is it mostly foreign capital, or what's going on? Do you see it also going further north?

It's mostly foreign capital in South Florida, being fed by Latin America, all areas in Latin America. While it started with real estate, real estate is the engine that drives many economies, but particularly the economy of South Florida. The result of real estate healing so quickly, [is that] the tangential economies around real estate … are coming back really strong.

So what else for BankUnited looks promising in the coming year?

We're happy to continue to do what we're doing. We're growing loans by almost $2 billion a year. The average size bank in Florida has a portfolio of $200 million worth of loans. So the way we look at it, we're growing the size of ten banks every year.

While we're not acquiring them, we are acquiring the business that many of them did.  We're very happy to continue to grow organically. We have a total of about 100 branches right now. We're close to being done in terms of building physical facilities in Florida, maybe a couple more further north. Generally speaking, we're going to concentrate now on reaping the rewards of the good hard work that we put in the last three or four years.

When you turn to the M&A market, I know that you were at least looking at potentially selling early in 2012 and didn't come to a transaction. Obviously the M&A market has been struggling — lukewarm at best. What do you think it's going to take for the industry to take off?

Most pundits agree that this industry is ripe for massive consolidation. There are over 7,000 banks, and unless the economy starts to thrive again and grow at a faster pace than most of us think it will, the industry is certainly overbanked.

You can make a good case for the fact that there are probably two or three thousand too many institutions in the United States. Over time if the economy stays where it is, and if interest rates stay where they are for a couple more years, I think that will eventually happen.

We thought when we went to Florida that M&A would be a big part of our business strategy. Turns out, it's not. We've not been able to turn up a transaction at the prices that we think are appropriate.

Do you think that this is really due the fact that sellers have unrealistic expectations? Presumably, buyers think that to be the case, but many people have been surprised how slow the market has been.

Of course sellers have unrealistic expectations. That was us. We had unrealistic expectations back in January when we toyed with the idea of selling the company. We now believe that choice is off the table.

I think the banks that are going to build value, create value for their shareholders, are going to have to work harder over the next two or three years and be one of the survivors.

Do you think that there's some point at which buyers and sellers will start to agree on prices at a much more rapid clip, or is there some sort of disconnect in the market that's not going to rectify itself any time soon?

There's always a point in time and a point on the value scale that people will come together. We've seen some of it.

The problem is that banks have been so massively devalued over the last five years that it's hard for anyone to get their heads around the new valuation levels.

Boards who may have had a bank stock selling for $40 a share six years ago … now the stock is selling for eight. Twelve looks like a lot of money to a buyer, and it looks paltry compared to where the levels of value used to be.

It will take some time for people to get accustomed to the new valuation levels.

I guess it's a lot like the housing market after the crash. There was a disconnect between what the market was willing to bear and what the sellers were willing to accept.

That's exactly right.

You've been in this business for a long time and obviously you hear a lot of people talking about how difficult the environment is currently with interest rates so low, with the regulatory burden and so on. Is this the worst you've ever seen it or is this sort of a case of good news-bad news for banks?

It's difficult to describe. It's the worst I've ever seen it in terms of the longer-term outlook for the industry. There have been periods over the course of my career where we've had some severe downturns in asset values. Oil in Texas. Real estate in the Northeast.

This doesn't seem like a cyclical issue. This seems like a structural change in the industry. People like to talk about the cost of regulation, and of course it's a problem. It's understandable that Congress has now forced a lot of new rules on this industry because of the role that banks have played in the downturn over the last five years.

The real problem is the margin. With interest rates at this level, and net interest margins coming down quarter by quarter in most institutions, it's very hard to imagine this number of institutions surviving over the long term.

Is it really just a race to live with these margins? What's going to separate survivors from those who will go by the wayside?

I think, as it's been printed in American Banker many times, that there's a race towards reducing expenses and for those management teams that are able to do that quickly enough and efficiently enough, they'll gain a leg up on the rest of the industry. You really need to start with a large store of capital to begin with, which is why we like to hold on to excess capital, because we think this is likely to be a long dry period.  The rewards will go to those who can make it through the tunnel.

Do you think smaller banks will be able to do so, or do you think that the regulatory burdens are just so great that small institutions aren't really going to be able to handle it?

Most people believe that the burdens are tougher on small institutions, and that's true today. Whether or not Congress will wake up to that and begin to make some exceptions for the smaller institutions… . We see some of it in Basel III negotiations, for instance, and I think it's fair to say unless there are accommodations made for smaller community banks, then their futures are very bleak.

Speaking to a slightly more positive topic, obviously even in the most difficult environments, some people not only survive but manage to thrive. Do you have any thoughts on what it's going to take, other than cost-cutting, for banks to do very well in this environment?

It's a time for creativity. We sit around a lot and think about how we've made money in the past, and how we might make money in the future. I think the rewards will go to the management teams who can figure this out. This is a very difficult time and this is a very difficult problem that we're all dealing with. Obviously some people will cope with it better than others. I think diversification of revenue sources is certainly one of the answers. Cost saves is another answer. And good old-fashioned American ingenuity is probably another.

Do you think technology is a big part of the answer?

Certainly, yes. Technology is part of the answer. We're seeing the emergence of some interesting new technology into banking on both the asset and the liability side. It's clearly having an impact on the delivery cost and it's a must for those who are going to succeed in the future. But that isn't the whole answer. The whole answer is yet to be unearthed.