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M&A creates poaching opportunities for commercial credits

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M&A creates poaching opportunities for commercial credits

Banks have been busy consolidating recently, which potentially creates poaching opportunities over target banks' loans.

There were 22 bank-and-thrift deals announced in May, including three transactions with a deal value of more than $1 billion. Lending executives said acquisitions present opportunities to steal some of the target banks' commercial-and-industrial, or C&I, clients.

"Clients always have the ability to re-evaluate relationships, and any time there is a deal, there is a potential for disruption," said John Behringer, a partner for RSM US, an accounting and consulting firm.

Fifth Third Bancorp's acquisition of MB Financial Inc. represented the largest bank deal in roughly two years. With significant size and a business focus in a prime market — C&I loans constitute 42% of Chicago-based MB Financial's portfolio — the company could be a prime target for competitors looking to steal share.

Other large deals will provide similar opportunities. S&P Global Market Intelligence data on commercial liens show opportunities at State Bank Financial Corp. and Guaranty Bancorp — both recently acquired banks in deals valued at greater than $1 billion. The two banks, as well as MB Financial, have multiple commercial liens with large private businesses. All three banks have relationships with companies that reported revenue of $200 million per year or more, according to the most recent data available via S&P Capital IQ.

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Bankers often talk about C&I lending as a relationship-driven business, so an acquisition could force large clients to reconsider their lending partners. Commercial borrowers often select banks for reasons beyond the loan's terms and pricing, valuing institutions that can also deliver cash management, debt syndication or other services.

Richard Jander, managing director for Maranon Capital, a Chicago-based nonbank, said the most likely competitors to poach MB Financial's business would be other commercial banks with a significant Chicago presence such as Wintrust Financial Corp., First Midwest Bancorp Inc. or Canadian Imperial Bank of Commerce.

As a larger bank, Fifth Third carries some reputation of focusing on larger loans especially when compared with the middle-market business MB Financial has successfully cultivated. However, Fifth Third has called MB Financial's middle-market and asset-based lending businesses a complementary fit to the regional bank's existing businesses. In other words, the Cincinnati-based superregional plans to fight to keep the loans to smaller businesses. C&I has been an area of focus for Fifth Third, increasing its concentration of business loans in recent years, reaching 39% last year.

"We are placing significant focus on retaining MB's commercial banking team," wrote Larry Magnesen, chief reputation officer for Fifth Third, in an email. "They have been highly successful and we have confidence in their ability to retain their clients."

Fifth Third's size could be a benefit for the legacy MB Financial business since the bank can provide customers a broader suite of services. Further, larger size tends to provide for a lower cost of capital that allows more competitive pricing.

The opportunities presented by the recent spate of large bank deals come at a time when competition for C&I loans remains high.

"C&I has been the most competitive space post-crisis, from my perspective," RSM's Behringer said. With rates at very low levels during the years after the 2008 credit crisis, banks were eager for earning assets. Following regulatory guidance that discouraged excessive exposure to commercial real estate loans, banks began to seek out C&I loans, Behringer said.

At the same time, lenders have reason to be cautious when bidding on business loans. While there are numerous strong points for the economy, such as low unemployment, tax reform and rising wages, there are also worrying signs such as higher interest rates and an economic cycle that appears due for a turn.

"We have a confluence of factors that are mixed, and I would presume we're late in the cycle," Behringer said. "Some of the loans we're making today will be the trouble loans of tomorrow."

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