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Without further M&A, rifts could appear in the banking sector

That power is consumed The March 2023 decision by three regional financial institutions has injured hundreds of small banks and slowed merger activity, an important potential lifeline, to a trickle.

As memories of last year's local banking crisis fade, it's easy to believe that the industry's situation is clear. However, the high interest rates that caused the collapse silicon valley bank 2023 peers are still active.

The Fed has raised interest rates 11 times through July, but has yet to do so. start cutting That benchmark.As a result, hundreds of billions of dollars unrealized loss Low-interest bonds and loans remain buried on banks' balance sheets. Couple this with the potential losses. commercial real estateleaving a wide swath of the industry vulnerable.

Of about 4,000 U.S. banks analyzed by the consulting firm claros group282 financial institutions have both high levels of commercial real estate exposure and large unrealized losses due to skyrocketing interest rates, a toxic combination that could force these institutions to raise new capital or merge. It becomes.

The study is based on a regulatory filing known as. call reportwas judged on two factors: banks with commercial real estate loans accounting for more than 300% of their capital, and companies with unrealized losses on bonds and loans pushing their capital levels below 4%.

Claros declined to name the financial institutions in its analysis for fear of triggering a deposit run.

However, this analysis found only one company with more than $100 billion in assets, and considering the factors in the study, it is not difficult to determine that: new york community banka real estate financier who averted the crisis with $1.1 billion earlier this month. capital injection The money came from private equity investors led by former Treasury Secretary Steven Mnuchin.

Most banks considered to be potentially in distress are community lender Assets are less than $10 billion. There are only 16 next-largest companies, including regional banks, with assets between $10 billion and $100 billion, but together these companies have more assets than the 265 regional banks combined. is held.

Behind the scenes, regulators are issuing secret orders to banks to improve their capital levels and staffing levels, according to Claros' co-founder. brian graham.

“If there were only 10 banks in distress, they would all be destroyed and dealt with,” Graham said. “Regulators have to walk a bit of a tightrope when hundreds of banks are facing these challenges.”

These banks will likely need to raise capital in one of two ways: private equity sources Either like NYCB or merging with a stronger bank, Graham said. That's what PacWest took last year.financiers in california obtained It was acquired by a smaller rival after losing deposits in the March turmoil.

Banks could choose to wait for bonds to mature and shrink their balance sheets, but doing so would mean that their rivals would continue to lose profits for years, effectively creating a “zombie” system that would not support economic growth in the community. It will operate as a “bank,” Graham said. This strategy also exposes us to the risk of experiencing increased loan losses.

Powell's warning

Chairman of the Federal Reserve System Jerome Powell admitted commercial real estate losses this month Probability is high Crushing some small and medium-sized banks.

“This is something we're going to be dealing with for years to come, and we're definitely going to see some bank failures,” Powell said. Said Members of Parliament. “We're working with them…it'll work out, is the word I like to use.”

There are other signs of growing stress among small banks. Fitch analysts said 67 financial institutions will have low levels of liquidity (meaning cash and securities that can be quickly sold when needed) in 2023, up from nine institutions in 2021. Ta. recent reports. They range in size from $90 billion in assets to less than $1 billion, according to Fitch.

And regulators have added even more companies to their list.question bank listThe list includes 52 financial institutions with total assets of $66.3 billion, an increase of 13 from the previous year, according to the Federal Deposit Insurance Corporation.

Traders work on the floor of the New York Stock Exchange (NYSE) on February 7, 2024 in New York City, USA.

Brendan McDiarmid | Reuters

“The bad news is that the problems facing the banking system have not magically gone away,” Graham said. “The good news is that compared to other banking crises I've experienced, this is not a scenario where hundreds of banks fail.”

'Pressure cooker'

After SVB's implosion last March, it was at the time the second-largest U.S. bank failure after Signature. failure A few days later and that day first republic In May, many in the industry were predicting what would happen next. wave of integration This could help banks cope with rising funding and compliance costs.

But there are very few deals. Fewer than 100 bank acquisitions were announced last year; according to Advisory firm Mercer Capital. The total transaction value of $4.6 billion turned out to be the lowest since 1990.

There's one big problem. Bank executives are unsure whether their deals will pass regulatory scrutiny.Approval timelines are getting longer, especially for large banks, and regulators are killed Recent transactions include a $13.4 billion acquisition first horizon by toronto dominion bank.

planned merger Between Capital One and DiscoveryIt was announced in February, but some members of Congress immediately called for it. block transaction.

“Banks are in this pressure cooker,” said Chris Caulfield, senior partner at consulting firm West Monroe. “Regulators are playing a bigger role in terms of possible M&A, but at the same time making it more difficult for banks, especially smaller banks, to make a profit.”

Investment bankers at one of the world's top three advisory firms say that despite the slow trading environment, leaders at banks of all sizes recognize the need to consider mergers.

The banker, who requested anonymity to discuss his clients, said the level of discussions with bank CEOs was the highest in his 23-year career.

“Everyone is talking and there needs to be a unified understanding,” the banker said. “The industry has structurally changed from a profitability perspective because of regulation and because deposits are never going to be zero again.”

Aging CEOs

One impediment to a merger is that bond and loan discounts are too large, and some portfolio losses will have to be realized in trades, which could deplete the combined company's capital. .It has declined since the end of last year as bond yields rise. Soaked From a 16-year high.

Sorrentino said he expects more activity this year, combined with a recovery in bank stocks. Other bankers said a big deal is likely to be announced after the U.S. presidential election, which could bring new leadership to key regulator roles.

Easing the path to a wave of U.S. bank mergers would strengthen the system and create challengers to the megabanks, the paper said. mike mayoa veteran bank analyst and former Federal Reserve official.

“Bank mergers, especially when the strong buy out the weak, should be a game-changer,'' Mayo said. “Merger restrictions on the industry jamie dimon protection law. ”

Summarize this content to 100 words That power is consumed The March 2023 decision by three regional financial institutions has injured hundreds of small banks and slowed merger activity, an important potential lifeline, to a trickle.As memories of last year's local banking crisis fade, it's easy to believe that the industry's situation is clear. However, the high interest rates that caused the collapse silicon valley bank 2023 peers are still active.The Fed has raised interest rates 11 times through July, but has yet to do so. start cutting That benchmark.As a result, hundreds of billions of dollars unrealized loss Low-interest bonds and loans remain buried on banks' balance sheets. Couple this with the potential losses. commercial real estateleaving a wide swath of the industry vulnerable.Of about 4,000 U.S. banks analyzed by the consulting firm claros group282 financial institutions have both high levels of commercial real estate exposure and large unrealized losses due to skyrocketing interest rates, a toxic combination that could force these institutions to raise new capital or merge. It becomes. The study is based on a regulatory filing known as. call reportwas judged on two factors: banks with commercial real estate loans accounting for more than 300% of their capital, and companies with unrealized losses on bonds and loans pushing their capital levels below 4%.Claros declined to name the financial institutions in its analysis for fear of triggering a deposit run.However, this analysis found only one company with more than $100 billion in assets, and considering the factors in the study, it is not difficult to determine that: new york community banka real estate financier who averted the crisis with $1.1 billion earlier this month. capital injection The money came from private equity investors led by former Treasury Secretary Steven Mnuchin.Most banks considered to be potentially in distress are community lender Assets are less than $10 billion. There are only 16 next-largest companies, including regional banks, with assets between $10 billion and $100 billion, but together these companies have more assets than the 265 regional banks combined. is held.Behind the scenes, regulators are issuing secret orders to banks to improve their capital levels and staffing levels, according to Claros' co-founder. brian graham.”If there were only 10 banks in distress, they would all be destroyed and dealt with,” Graham said. “Regulators have to walk a bit of a tightrope when hundreds of banks are facing these challenges.”These banks will likely need to raise capital in one of two ways: private equity sources Either like NYCB or merging with a stronger bank, Graham said. That's what PacWest took last year.financiers in california obtained It was acquired by a smaller rival after losing deposits in the March turmoil.Banks could choose to wait for bonds to mature and shrink their balance sheets, but doing so would mean that their rivals would continue to lose profits for years, effectively creating a “zombie” system that would not support economic growth in the community. It will operate as a “bank,” Graham said. This strategy also exposes us to the risk of experiencing increased loan losses.Powell's warningChairman of the Federal Reserve System Jerome Powell admitted commercial real estate losses this month Probability is high Crushing some small and medium-sized banks.”This is something we're going to be dealing with for years to come, and we're definitely going to see some bank failures,” Powell said. Said Members of Parliament. “We're working with them…it'll work out, is the word I like to use.”There are other signs of growing stress among small banks. Fitch analysts said 67 financial institutions will have low levels of liquidity (meaning cash and securities that can be quickly sold when needed) in 2023, up from nine institutions in 2021. Ta. recent reports. They range in size from $90 billion in assets to less than $1 billion, according to Fitch.And regulators have added even more companies to their list.question bank listThe list includes 52 financial institutions with total assets of $66.3 billion, an increase of 13 from the previous year, according to the Federal Deposit Insurance Corporation.Traders work on the floor of the New York Stock Exchange (NYSE) on February 7, 2024 in New York City, USA.Brendan McDiarmid | Reuters”The bad news is that the problems facing the banking system have not magically gone away,” Graham said. “The good news is that compared to other banking crises I've experienced, this is not a scenario where hundreds of banks fail.”'Pressure cooker'After SVB's implosion last March, it was at the time the second-largest U.S. bank failure after Signature. failure A few days later and that day first republic In May, many in the industry were predicting what would happen next. wave of integration This could help banks cope with rising funding and compliance costs.But there are very few deals. Fewer than 100 bank acquisitions were announced last year; according to Advisory firm Mercer Capital. The total transaction value of $4.6 billion turned out to be the lowest since 1990.There's one big problem. Bank executives are unsure whether their deals will pass regulatory scrutiny.Approval timelines are getting longer, especially for large banks, and regulators are killed Recent transactions include a $13.4 billion acquisition first horizon by toronto dominion bank.planned merger Between Capital One and DiscoveryIt was announced in February, but some members of Congress immediately called for it. block transaction.”Banks are in this pressure cooker,” said Chris Caulfield, senior partner at consulting firm West Monroe. “Regulators are playing a bigger role in terms of possible M&A, but at the same time making it more difficult for banks, especially smaller banks, to make a profit.”Investment bankers at one of the world's top three advisory firms say that despite the slow trading environment, leaders at banks of all sizes recognize the need to consider mergers.The banker, who requested anonymity to discuss his clients, said the level of discussions with bank CEOs was the highest in his 23-year career.”Everyone is talking and there needs to be a unified understanding,” the banker said. “The industry has structurally changed from a profitability perspective because of regulation and because deposits are never going to be zero again.”Aging CEOsAnother reason to expect increased merger activity is the age of bank leaders. According to 2023 data from executive search firm Spencer Stewart, one-third of regional bank CEOs are 65 or older, exceeding the group's average retirement age. The company said this could lead to a wave of employee turnover over the next few years.”There's a lot of people who are tired,” said Frank Sorrentino, an investment banker at boutique advisory firm Stevens. “This is a tough industry and there are many willing sellers looking to do a deal, whether it’s an outright sale or a merger.”Sorrentino was in the game in January. merger Between First Sun home streetis a Seattle-based bank whose stock price plummeted last year as funding became tighter. He predicts a surge in merger activity among lenders with assets of $3 billion to $20 billion as small and medium-sized businesses look to scale up.One impediment to a merger is that bond and loan discounts are too large, and some portfolio losses will have to be realized in trades, which could deplete the combined company's capital. .It has declined since the end of last year as bond yields rise. Soaked From a 16-year high.Sorrentino said he expects more activity this year, combined with a recovery in bank stocks. Other bankers said a big deal is likely to be announced after the U.S. presidential election, which could bring new leadership to key regulator roles.Easing the path to a wave of U.S. bank mergers would strengthen the system and create challengers to the megabanks, the paper said. mike mayoa veteran bank analyst and former Federal Reserve official.“Bank mergers, especially when the strong buy out the weak, should be a game-changer,'' Mayo said. “Merger restrictions on the industry jamie dimon protection law. ”
https://www.cnbc.com/2024/03/19/where-cracks-in-the-banking-sector-may-appear-without-more-ma.html Without further M&A, rifts could appear in the banking sector

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