Snapshot for week beginning 25 April. The economic effect of the pandemic has resulted in tightened credit standards and reduced demand for many types of loans.
One solution to the problem, diversification, allows banks to expand beyond traditional lending sources of revenue. Diversification is also the standard approach to managing the trade-off between portfolio risk and return.
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Ultimately, banks that are better diversified and less likely to fail. This, in turn, helps to create a healthier banking system that is less prone to banking crises.
A merger is common tool for diversification. A company may use a merger to diversify its business operations by entering into new markets or offering new products or services.
A company may also arrange a merger deal to diversify risks related to its operations.
In this week’s featured deal, two US banks undertake an all-stock merger to diversify their revenue streams.
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By GlobalDataDeal of the week: The strategic merger of New York Community Bancorp and Flagstar Bancorp
New York Community Bancorp and Flagstar Bancorp have entered into a definitive merger agreement under which the two companies will combine in an all-stock merger.
Flagstar shareholders will receive 4.0151 shares of New York Community common stock for each Flagstar share they own.
Following completion of the transaction, the New York Community shares held by New York Community shareholders immediately prior to the transaction are expected to collectively represent approximately 68% of the combined company.
The New York Community shares issued to Flagstar shareholders in the merger are expected to represent approximately 32% of the combined company.
The implied total transaction value based on closing prices as of April 23, 2021 is approximately $2.6 billion.
The new company will have over $87bn in assets and operate nearly 400 traditional branches in nine states and 87 loan production offices across a 28-state footprint.
It will have its headquarters on Long Island, NY with regional headquarters in Troy, MI, including Flagstar’s mortgage operations.
The combined company will maintain the Flagstar Bank brand in the Midwest. Flagstar’s mortgage division will also maintain the Flagstar brand. Other states will retain their current branding.
Thomas R. Cangemi will be President and Chief Executive Officer of the combined company. He said:
“When I was appointed President and CEO of New York Community earlier this year, one of my top priorities was to seek out a like-minded partner that would provide NYCB with a diversified revenue stream, an improved funding mix, and leverage our scale and technology, as we transition away from a traditional thrift model. In Flagstar, we have found such a like-minded partner.”
He said the combination of the two companies will allow each to continue its transformation to a full-service commercial bank.
The banks will be able to broaden their product offerings while expanding their geographic reach with no branch overlap.
The transaction is expected to close by the end of 2021, subject to the satisfaction of customary closing conditions. These include the receipt of the requisite regulatory approvals and the requisite approval by the shareholders of each company.
The double-edged sword of banking diversification during the Covid crisis
Diversification may be both beneficial and detrimental for global banks in the coronavirus crisis, according to some analysts.
While a greater mix of assets and revenue streams may offer protection from large concentrated losses, wider networks could leave them more vulnerable to global shocks, they suggest.
Banks operating in many markets can see some diversification value in terms of risk and financial stability, according to a working paper compiled by the Bank for International Settlements published on April 20.
A greater geographic spread can protect the banks from the adverse effects of an economic downturn in their home markets, authors Iñaki Aldasoro, Bryan Hardy and Maximilian Jager found in a study of 94 global banking groups.
But it also increases their exposure to global economic shocks, they said.
Banks with higher geographic complexity will tend to see global shocks impact their riskiness more if the business cycles of the countries in which they operate “show a high loading on the global shock,” the authors said.
