significantly changed the US retail banking landscape, with the
market now dominated by three institutions: Wells Fargo, Bank of
America and JPMorgan Chase. But there is more consolidation to
come, especially from the mid-tier segment. Charles Davis reports
from the US.
The ramifications of the past few weeks’ financial meltdown on Wall
Street and across the US generally defy instant analysis, the
damage so great and the change so rapid that each new day brings a
reordering of the banking landscape.
In terms of retail banking, it is all
change: huge companies such as Washington Mutual and Wachovia have
gone, with more set to follow – especially among a number of
struggling mid-tier players – as the need for further market
consolidation digs in.
Perhaps the starkest ‘deal’ done so far,
however, has been the partial nationalisation of nine major US
banks.
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In a move which closely mirrored the UK
government’s bank recapitalisation initiative (see HSBC stands
out from the crowd), albeit on more favourable terms to
shareholders, nine of the biggest names in US banking – Bank of
America, Citi, Goldman Sachs, JPMorgan Chase, Merrill Lynch, Morgan
Stanley, Bank of New York Mellon, State Street and Wells Fargo –
will have the US government as a stakeholder.
The latest US government moves confirm
beyond doubt that easy money is the stuff of yesteryear; the US
banking industry realises it is entering a new era of tight money,
tough regulation, less speculation and more government meddling in
markets than ever before.
Powerless to stop the
change
It is a sea change, and one the US retail
banking industry is powerless to stop.
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By GlobalDataAs for the survivors, fiscal Darwinism
reigns. Goldman Sachs and Morgan Stanley have the potential to
emerge stronger, transforming themselves into bank holding
companies and stockpiling capital, sacrificing near-term results
for long-term stability.
Goldman Sachs attracted $5 billion from
Warren Buffett’s Berkshire Hathaway investment vehicle and public
investors, while Morgan Stanley finally concluded its long-running
deal with Mitsubishi UFJ.
Japan’s largest bank picked up 21 percent
of Morgan Stanley for a $9 billion investment, made up of $6
billion in preferred shares and $3 billion of common stock, while
securing $900 million in annual dividends.
Arguably, JPMorgan Chase, Bank of America
and Wells Fargo stand as the major beneficiaries of the crisis. The
trio held 21.4 percent of all deposits at the start of this year.
Now, after a rush of rescue deals, they collectively hold more than
31 percent.
The pace and scope of the deals was
breathtaking. In any other era, JPMorgan’s acquisition of the
savings-and-loan giant Washington Mutual (WaMu) in a
government-assisted deal would be an instant contender for the
banking deal of the year. But these are extraordinary times.
Bank of America gets Merrill
Lynch
Other major deals included Bank of America
coming to the rescue of Merrill Lynch, adding a big investment
banking arm to an already massive retail banking franchise, and
Wells Fargo prevailed over Citigroup in the messy race for
Wachovia, taking over the fifth-largest US lender by assets.
For Citi, failure to close the Wachovia
deal was widely regarded to be a humiliation. It went head-to-head
with Wells Fargo to win control of Wachovia’s $448 billion of
deposits in 21 states, offering $2.16 billion for the banking
operations.
As part of the deal, the Federal Deposit
Insurance Corporation agreed to absorb any losses beyond $42
billion on a $312 billion pool of Wachovia loans. 
But Wells Fargo trumped the bid with an
offer valued at $15.1 billion, without requiring any guarantees
from the FDIC.
“We did not seek the Wachovia transaction;
Wachovia brought it to us,” said Citigroup’s CEO Vikram Pandit.
“Our focus remains on capitalising on our global strengths. We will
continue to apply the same discipline we employed in this and other
recent transactions to future acquisition opportunities.”
Now the US has four institutions – the
three widely perceived beneficiaries plus Citigroup – that will
attain quasi-state status, as they are clearly too big to fail and
will be supported by federal intervention in any downfall. At
least, that is the only conclusion one can draw from the current
crisis.
The combination of Wells Fargo and
Wachovia will surpass Bank of America as the country’s largest
retail bank. With more than half of Wachovia’s branches on the east
coast of the US and Wells Fargo’s reach stretching from California
to Texas and Minnesota, a national retail banking champion is
born.
While Wells Fargo has quietly emerged as
one of the few stable banking giants, it has not escaped unscathed
– though it is in much better shape than many regional players. The
group posted third quarter net income of $1.64 billion, down from
$2.17 billion in Q307 (see News Digest). In the past
month, it warned it would take unspecified charges in the third
quarter related to $480 million of investments in Fannie Mae and
Freddie Mac and $199 million in Lehman Brothers, which filed for
bankruptcy on 15 September.
Its exposure is limited, however, because
Wells never originated option adjustable-rate mortgages, which
initially allow customers to pick monthly payments so low that the
total debt grows each month, or what are called no-doc loans, in
which they are not required to provide verification of income or
assets.
During the week of the bail-out, a week
that opened with the Dow Jones industrial average experiencing its
sixth-largest drop ever, Wells Fargo shares reached a 52-week high.
And as thousands in the financial sector lose or fear for their
jobs, the San Francisco-based bank is actively recruiting, with
plans to add thousands of employees across the nation and at least
250 in the Bay Area.
By snapping up Washington Mutual, JPMorgan
Chase expanded its branch network by an eye-popping 70 percent,
giving it a total of 5,410 branches, adding the states of
California, Oregon and Washington to its retail franchise, while
gaining 250 branches in Florida, where its network was very small
and where the company has long wanted to expand.
Dominated by a few gigantic banks
Whether intentional or by exigency, the US
banking market now draws comparisons to the banking industries in
other highly developed nations whose financial systems are
dominated by a few gigantic banks overseen by a single powerful
regulator.
The trend will lead to greater regulation
by its very nature, as the Federal Reserve and the United States
Treasury, as a condition of helping troubled financial
institutions, are forcing the combinations of big banks and
requiring lightly regulated Wall Street firms to become commercial
banks.
Commercial banks are highly regulated and
are required to have a far larger capital cushion against
losses.
Regional banks are being punished even
more severely by the equity markets as investors scramble to figure
out which of them, if any might fall next. National City
Corporation, Downey Financial Corporation and Sovereign Bancorp,
lenders pressured by substantial exposure to souring mortgages,
were especially hard hit, falling 63 percent, 48 percent and 36
percent in value in the week preceding passage of the bail-out
bill.
Sovereign was the first to succumb, with
Spanish giant Santander agreeing on 13 October to buy the remaining
75.65 percent of Sovereign it did not already own, in a stock swap
valued at $1.9 billion.
Analysts suggest Sovereign was pushed into
the sale by a run-off in deposits in the third quarter, while the
possibility of credit deterioration may also have speeded up the
sale.
Reaction to the deal was decidedly mixed.
Investment bank Keefe, Bruyette & Woods suggested “this was not
the best deal for Santander strategically. European Banks have a
poor track record in US and more merger and acquisition activity
may be needed to make the US sufficiently profitable [for
Santander]”.
Standard & Poor’s, however, disagreed
and said: “Overall, we see this pending acquisition as a positive
development, as we believe Santander has taken another good
opportunity to grow at a good price.”
The ailing Cleveland-headquartered bank
National City, the 11th-largest US bank by assets, is in play and
looks set to be next to surrender its independence. While analysts
have suggested it is facing as much as $8.1 billion in loan losses,
it has attracted the interest of a number of suitors, said to
include PNC and Scotiabank. It has around 1,400 branches in nine
states, primarily in the Midwest, and could also interest Bank of
America and Wells Fargo as a way of filling in gaps in their
national networks.
Regions Financial, Huntington Bancshares,
KeyCorp, BB&T, PNC and SunTrust Banks all have seen their
market positions improve throughout the crisis and are poised,
perhaps, to benefit from any further consolidation.
Major concession
Small banks and credit unions, which have
also weathered the storm relatively well, wrangled a major
concession out of the bail-out package with congress, agreeing a
provision to increase the limit on government-insured bank deposits
to $250,000, from $100,000.
Community banks had already been pushing
for an increase in deposit insurance, arguing it would help owners
of small businesses who often keep more than $100,000 at a single
bank to meet payroll or for daily operating needs. The proposal had
never attracted real support until now, when congressional leaders
needed the support of community bankers to get the bail-out bill
passed.
Smaller banks have been in a long-running
battle with rival financial institutions like money-market mutual
funds and money management companies to handle the cash savings of
consumers and companies. By persuading lawmakers to attach the
deposit insurance provision, the bankers scored a huge victory.
One of many wild cards in the market is
whether Goldman Sachs and Morgan Stanley want to develop a large
deposit base in order to diversify their cost of funds. They would
have to do so by buying regional banks. Given their new status as
holding companies, this would be a logical next step. A few weeks
ago, money was moving away from regional banks; following the
bail-out, they became havens of safety thanks to the federal
government.
The US industry may quickly be headed
toward a new era dominated by two types of banks. On the one hand,
there will be small community banks and credit unions that offer
personalised service and take advantage of their local ties. On the
other, there will be behemoths that compete on the breadth of their
products and potential cost savings from their size.
| RBI DEALWATCH RBI DealWatch tracks global financial services mergers and acquisitions, privatisations and demutualisations, flotations, divestments, share stakes, strategic alliances and joint ventures. |
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| Country | Participants | Type/value | Description |
|
EUROPE, MIDDLE EAST, |
|||
| Switzerland | Credit Suisse, Koor Industries | Stake acquisition, $1.6bn | Israeli-controlled Koor Industries has picked up a 3 percent stake in Credit Suisse for around $1.6 billion. To date, Credit Suisse has come through the credit crisis in better shape than its larger rival UBS and remains in expansionist mode. On 13 October, Credit Suisse’s head of Asia-Pacific private banking said the bank could boost its private banking team in Asia by as much as 80 percent in the next three years and would aim to grow assets by 25 percent a year. |
| The Netherlands | ING | Capital injection, €10bn | ING has benefited from a €10 billion ($13.4 billion) capital injection from the Dutch state to shore up its core capital. The government will buy a new class of securities that count towards ING’s core Tier 1 capital but have no voting rights and are not dilutive for ordinary shareholders. ING also announced it had agreed to sell its Taiwan life insurance unit to Fubon Financial for $600 million. The €10 billion injection will boost ING’s Tier 1 capital, which stood at 6.5 percent at the end of September, to 8 percent. “Our capital position was in line with previously targeted levels and regulatory requirements,“ said ING CEO Michel Tilmant. “However, market conditions have changed dramatically in recent weeks and have led to an internationally recognised belief that going forward capital requirements for financial institutions should be higher.” |
|
France |
Crédit Agricole, Norinchukin Ban | Stake acquisition, $285m | Japan’s Norinchukin Bank has acquired a 0.5 percent stake in France’s largest banking group, Crédit Agricole, for around $285 million. The two banks said they would consider ways to strengthen cooperation in their international operations. |
|
France |
Caisses d’Epargne, Banque Populaire | Merger talks | French mutuals Banque Populaire and Caisses d’Epargne have confirmed they are discussing a possible merger which would create the country’s second largest retail bank after 9,089 branch-strong Crédit Agricole. The banks said if the merger is concluded, the new group would have assets of €40 billion ($53.6 billion), €480 billion in savings and deposits, revenue of €17.5 billion and a combined branch network of 8,108 units servicing around 35 million retail customers of whom 16 million are considered active customers. The two banks have endured a frustrating year in respect of their existing joint venture, investment bank Natixis, which has lost 75 percent of its market capitalisation since the start of 2008 (see French mull new retail banking giant). |
| Italy | UniCredit | Capital raising | Italy’s largest bank by assets, UniCredit, has said it will shore up its finances by selling off some of its real-estate assets amid rising concerns about its liquidity position. The bank has targeted a core Tier 1 capital ratio of 6.2 percent by the end of the year, compared with 5.55 percent in June, with plans to raise €6.6 billion. UniCredit’s market capitalisation has fallen by 50 percent since the start of the year. In a strategy update given in June, the group said it wanted to have around 12,000 branches by the end of 2010, cutting some branches in Italy but opening 1,287 in Central and Eastern Europe (CEE) as it looks to exploit further its dominant position across the CEE region (see RBI 595). |
| UK | Santander | Capital injection, £1bn | Following its July acquisition of the UK’s Alliance & Leicester and September’s £612 million ($1.05 billion) deal to snap up the deposits and branches of the failing Bradford & Bingley, Santander has injected £1 billion of extra capital into its UK business. The bank says this will increase its Tier 1 ratio from about 8 percent to 9.25 percent by the end of the year. Once its latest UK deals are concluded, Santander’s UK arm will have around £112 billion in retail savings and a branch network of more than 1,200 units. |
| UK | ING Direct, Landsbanki, Kaupthing | Partial acquisitions, £3bn | ING has acquired more than £3 billion worth of UK-based deposits from failed Icelandic online savings providers Landsbanki and Kaupthing, made up of £2.5 billion from former Kaupthing Edge savers and £538 million from Landsbanki’s Icesave depositors. “ING Direct is in a position of strength. We are very pleased to have been able to take such rapid and decisive action that has provided [Landsbanki] customers, and those of Kaupthing Edge, with the reassurances they need,” said ING Direct’s UK chief executive, Johan de Wit, in a statement. |
| UK | Mitsubishi UFJ, Aberdeen Asset Management | Stake acquisition | Japan’s Mitsubishi UFJ Financial Group (MUFG) has bought a 9.9 percent stake in UK-based fund manager Aberdeen Asset Management as part of a strategic alliance, in a deal which valued Aberdeen at more than $1.5 billion. MUFG said the deal would help it gain access to Aberdeen’s expertise in emerging market products. |
| Germany | ING, Interhyp | Stake increase | ING has increased its stake in Interhyp, Germany’s largest independent residential mortgage distributor, from 91.21 percent to 96.95 percent, in a deal which values Interhyp at €416 million. |
| UK | Britannia, Co-operative Financial Services | Possible merger | Britain’s second-largest mutual, the Britannia Building Society, has discussed a possible merger with the country’s leading self-styled ethical banking group, Co-operative Financial Services. The combined group would have around £70 billion in assets and 6 million customers. Britannia chief executive Neville Richardson said the mutual was not in trouble and the two “do not need to merge”, and any such merger would represent “a merger of strong equals”. |
| Denmark | Nordea, Roskilde Bank | Acquisition | Nordea has agreed a €47 million deal to acquire nine branches of the former Roskilde Bank in the Zealand region of Denmark. Roskilde failed in August and was taken over by the country’s central bank and dismantled after loans to real-estate projects failed. |
| Belgium, Sweden | Fortis, BNP Paribas | Nationalisation, sale | The Netherlands government has bought all of Fortis’s Dutch operations for €16.8 billion, including the failed bancassuer’s Dutch-based ABN AMRO banking and insurance operations. The move leaves the way open for ABN AMRO to be revived as an independent bank, with the Dutch government planning to privatise the Fortis/ABN AMRO business once the markets have recovered. In a separate deal, BNP Paribas acquired Fortis Bank in Belgium, Luxembourg, the Belgian insurance operations and its Turkish banking division, becoming the largest bank in the eurozone by deposits. Following the break-up, all that remains of Fortis is the group’s international insurance operations and a majority stake in a vehicle holding €10.4 billion of structured credits (see News Digest). |
| Italy | UniCredit | Stake acquisition | The Central Bank of Libya, the Libyan Investment Authority and Libyan Foreign Bank have bought a 3.67 percent stake in Italy’s UniCredit for €1.1 billion ($1.5 billion), upping their overall interest to 4.23 percent and making Libya the bank’s second largest shareholder. The investors also said that they would purchase up to €500 million in additional shares in order to support UniCredit’s forthcoming capital raising of up to €6.6 billion (see above). |
| THE AMARICAS | |||
| US | Wells Fargo, Wachovia | Acquisition, $15.1bn | Wells Fargo is buying all the operations of Wachovia in a whole company transaction requiring no financial assistance from the Federal Deposit Insurance Corporation (FDIC) or any other government agency – trouncing an earlier deal between Citi and Wachovia. Wachovia shareholders will receive 0.1991 shares of Wells Fargo common stock in exchange for each share of Wachovia common stock. The transaction, based on Wells Fargo’s closing stock price of $35.16 on 2 October, is valued at $7 per Wachovia common share for a total transaction value of approximately $15.1 billion. The deal makes Wells Fargo the largest retail bank in the US, ahead of Bank of America (see above). |
| US | JPMorgan Chase, Washington Mutual | Partial acquisition | JPMorgan Chase has acquired all the deposits, assets and certain liabilities of Washington Mutual’s banking operations from the Federal Deposit Insurance Corporation (FDIC). Excluded from the transaction are the senior unsecured debt, subordinated debt, and preferred stock of Washington Mutual’s banks. JPMorgan Chase will not be acquiring any assets or liabilities of the banks’ parent holding company or the holding company’s non-bank subsidiaries. As part of this transaction, JPMorgan Chase will make a payment of approximately $1.9 billion to the FDIC. The acquisition expands Chase’s consumer branch network into the states of California, Florida and Washington State and creates the third-largest branch network in the US – with locations reaching 42 percent of the US population. The combined 5,400 branches in 23 states will also serve as a base to extend the reach of the business banking, commercial banking, credit card, consumer lending and wealth management businesses, said JPMorgan Chase in a statement. The acquisition is expected to be immediately accretive to earnings and to add more than 50 cents per share in 2009. JPMorgan Chase expects to incur pre-tax merger costs of approximately $1.5 billion while achieving annual pre-tax cost savings of approximately $1.5 billion by 2010, net of significant investments in the business. The bank plans to complete most systems integrations and rebranding by year-end 2010, closing less than 10 percent of branches in the combined network in overlapping markets. In conjunction with the acquisition, JPMorgan Chase will be marking down the acquired loan portfolio by approximately $31 billion, which primarily represents its estimate of remaining credit losses related to the impaired loans. |
| US | National City | Sale | US regional bank National City is in talks with a number of banks about a possible sale, the Wall Street Journal said, citing people familiar with the situation. PNC Financial Services Group and Toronto-based Bank of Nova Scotia are among the potential bidders, the paper added. |
| US | Meridian Bank | Bank failure | Regulators have closed Illinois-based Meridian Bank, with the Federal Deposit Insurance Corporation (FDIC) the named receiver. The FDIC approved the assumption of the $36.88 million in total deposits of Meridian by Illinois-headquartered National Bank. Meridian had total assets of $39.18 million as of 25 September. |
| Canada | CIBC | Capital raising, C$1.05bn | Canadian Imperial Bank of Commerce (CIBC), the country’s fifth-largest bank, has shored up its balance sheet with a C$1.05 billion ($884 million) cash injection from private equity fund Cerberus Capital Management. CIBC, the hardest hit of Canada’s major banks by the credit crisis, will pay a very high annual rate of 20 percent or about $200 million for what it hopes will be a short-lived partnership. |
| US | Santander, Sovereign | Acquisition | Santander paid when it purchased the initial 24.35 percent stake in 2005. With $79 billion in assets, Sovereign has recently suffered heavy losses from the credit crisis, including losses on its holding of more than $600 million of preferred stock issued by Fannie Mae and Freddie Mac. The all-stock deal, at a rate of one Santander share for 3.4 shares in Sovereign, values the US bank at about $2.4 billion. |
| US | Main Street Bank | Bank failure | Michigan-based Main Street Bank has been shuttered by regulators and its deposits assumed by Monroe Bank & Trust. Main Street Bank had total assets of $98 million and deposits of $86 million as of 7 October. |
| ASIA-PACIFIC | |||
| Australia | Members Equity Bank | Strategy update | Australian regional lender Members Equity Bank, which has been heavily dependent on mortgage securitisation to finance its lending, has hinted the bank will consider forming a joint venture or possibly merging with other regional banks such as Bendigo. “There is a big opportunity and a social imperative for a new player to emerge in the small-to-medium end of the banking industry,” said Members Equity director Garry Weaven. Any such mid-tier consolidation would be welcomed by the Australian government, which has warned that the country’s Big Four banks are taking market share at the expense of mid-tier banks. |
| Australia | Suncorp-Metway | Sale rumours | Australia’s third-largest insurer, Suncorp-Metway, has abandoned talks to sell its banking and wealth management units, in the hope of achieving a better price after the Australian government guaranteed banks’ deposits and debt. On 12 October, the government said it would guarantee all deposits for the next three years and all term wholesale funding. According to a report by Australian media agency ASX, Suncorp chairman John Story said recent market events have “determined that this process was unlikely to result in offers reflecting the operational or strategic value” of the two Suncorp divisions. Analysts had estimated Queensland-headquartered Suncorp’s bank would fetch anything between A$4.5 billion ($3.02 billion) to A$6 billion while the wealth management unit might be worth between A$1.5 billion to A$2.5 billion. While Suncorp did not disclose which banks had shown an interest, Commonwealth Bank of Australia has confirmed it was involved in discussions; National Australia Bank is also thought to have shown interest with ANZ also thought to have taken a look given its ambition to increase its wealth management offering (see ANZ looks to break China). |
| Australia | Commonwealth Bank of Australia, BankWest, HBOS | Sale | Commonwealth Bank of Australia has snapped up UK-based HBOS’s Australian subsidiary, BankWest, for a cut-price A$2.1 billion, around one-third of the price HBOS had initially been thought to be seeking when sale rumours surfaced earlier this year. The price of the deal, at around 20 percent below book value, is on the low side compared to the value of Westpac’s A$16 billion deal to buy St George for more than 2.5 times book value earlier this year (see RBI 592). BankWest has around 860,000 customers, mainly in the state of Western Australia, but has also been expanding its retail banking operations in the more populous eastern Australian markets and revealed plans last year to challenge the country’s Big Four by launching an ambitious branch expansion programme. BankWest’s net profit grew 5.7 percent in 2007 to A$204 million, and it had total assets of A$59.8 billion in June this year. |
| China | ING, Bank of Beijing | Possible stake increase | ING’s chief executive of retail and private banking in Asia, Philippe Damas, has told Reuters the bank wants to increase its stake in Bank of Beijing to 20 percent and is considering applying for a retail banking licence in China. “That is clearly our intention, to increase the stake back to 20 percent, which is the maximum allowed by the regulator.” Asia-Pacific currently accounts for 6 percent of ING’s profit before tax. Damas said the plan is to increase that share to between 20 percent and 25 percent in less than 10 years. ING will continue to target retail growth in its existing markets of China, Thailand and India but will also look to enter other countries in the region which offer good growth and a large middle class. Damas flagged up Thailand as offering potential, with ING aiming to grow its branch network and increase its market share of retail deposits. |
