In the current market for deals, many mergers involvelarge regional banksteaming up to build scale while many acquisitions are the takeover ofsmall community banksbuckling under regulatory weight and low interest rates.
But in the face of uncertainty regarding interestrates and the election, banks might have to start thinking outside ofthe box to grow their businesses. At the Annual Bank M&A Symposium hostedby S&P Global Market Intelligence, managing partner of Federal FinancialAnalytics, Karen Shaw Petrou, said Sept. 23 that if banks want to separatethemselves from the pack, they should pursue deals that consider much more thanjust geography.
"Think about your consumer base. Think about yourtargets. And then you'll start to see where comparative advantage lies,"she said.
Petrou suggested looking at nontraditional and nicheacquisitions that would fit well within a bank's model.
PinnacleFinancial Partners Inc., a bank based in Nashville, Tenn., foundits footing in the healthcare market.
"We were trying to build out a medical practice unit inNashville … and we kept running into this 'Bankers Healthcare Group' and werequite curious as to why these people were in our market," Pinnacleexecutive vice president Harold Carpenter Jr. said during a panel discussion Sept.22.
Pinnacle began its relationship with BHG by originatingtheir loans, many of which went to their target market of doctors andveterinarians. But when principal shareholders offered to sell their stakes,Pinnacle acquired 19% of the group in a cash-and-stock deal that closed in March. Carpenter saidthe investment is raking in returns of 15% to 17%.
"We consider ourselves to be organic growers. We thinkthe market pays a little better as an organic grower," Carpenter said.
Pressures to get creative with M&A are also coming fromthe financial technology space, where new innovations focused around speed andconvenience are raising consumer expectations for banking services. In the samepanel on Sept. 22, Cornerstone Advisors senior director Vincent Hui said thatbanks should expect a "consumer interface arms race," which couldtake the form of fintech partnerships or even acquisitions — a costly endeavor.
"How are you going to free up capital to invest whilestill driving earnings growth and investor return?" Hui asked.
Petrou said if the industry wants to survive, investors haveno choice but to embrace the risk.
"If we're going to sustain banking as a franchise — bigor small — the business cannot continue as a viable industry at 7% or 8%ROE," Petrou said. "Investors are not heroes. They're not saints.They want return, and we have to come up with new ways to find it."