? Higher stock prices give buyers a stronger currency but raise sellers' hopes
? Bankers should lower their expectations about regulatory reform
Brian Johnson, managing director of financial institutions at Commerce Street Capital
S&P Global Market Intelligence caught up with Brian Johnson, managing director of Commerce Street Capital's financial institutions group, to learn about how the market for mergers and acquisitions could be shifting following the election of President Donald Trump. With his focus on Texas and the southeast, Johnson also has a first-hand look at how banks in the Lone Star State weathered low energy prices and may be returning to the capital markets. Below is an edited transcript of that conversation.
S&P Global Market Intelligence: What does the interest in bank acquisitions look like in your footprint, and has it changed since the election?
Brian Johnson: The banking sector is feeling much better than last year, and that's driven by the fact that under a Trump administration, there's anticipation for a faster rising interest rate environment, less regulatory burden and hopefully tax reform. Bank stocks were up as much as 30% post-Trump election and that helps would-be buyers bridge the bid-ask spread on potential transactions with a higher-valued currency. There are more active discussions going on right now. M&A volumes were down last year so there could also be some pent-up demand by historical acquirers. I think all those factors should make for a fairly robust 2017.
The higher stock prices seem to be translating into higher deal valuations year-to-date. How are potential sellers responding?
There are a number of management teams and boards looking at the headline numbers and applying them to their banks to figure out what they mean in absolute dollars, and there are some who probably wouldn't have thought about selling last year but are taking a much harder look at transactions. We're working with a couple of banks that may have increased their pricing expectations, too, so that offsets buyers with strong currencies. The ball may have moved on the "ask."
The Federal Reserve recently announced it was increasing the asset threshold for heightened scrutiny on deals. Now, acquisition of less than $10 billion in assets, or that result in a firm with less than $100 billion in total assets, are "generally not likely to create institutions that pose systemic risks." Before, that threshold was for acquisitions of less than $2 billion in assets or mergers that result in a firm of less than $25 billion in assets. How do you think this will impact future M&A?
I think it will help improve the bank M&A landscape. $2 billion is a low threshold to trigger a systematic risk threshold, so I think it will help the community bank sector on effecting more transactions. There were 14 deals as of March 22 that would've fallen under the previous threshold. Moving it to the $10 billion/$100 billion threshold brings it down to only four. Less regulatory burden and less scrutiny should help the bank M&A process move more smoothly.
How are Texas banks doing following the decline in energy prices and the related hit to share prices? What has that meant for M&A?
Last year was a pausing moment for both buyers and sellers. I think buyers were internally focused and they didn't have the currency to pursue transactions. Quite honestly they had fear about what they were acquiring and the credit risk on the seller's balance sheet. I think sellers had the same concerns about buyers. Now with oil prices in the high $40s and mid-$50s, there's some stability in the market. There's been improvement in the number of banks trading north of 2x book price.
Texas' largest private bank, Cadence Bancorp LLC, recently filed for an IPO. What does the IPO market for banks look like and why might Cadence finally go public as it reaches the $10 billion threshold?
For someone like a Cadence, it gives legacy shareholders a form of liquidity. But it's also very challenging to be competitive in the M&A process if your only tool for an acquisition is cash. A public currency that trades at a reasonable multiple makes you a much more competitive acquirer. I think there's still a fair amount of pent-up demand for Texas public banks, so my suspicion is the offering will go well.
Do you think they'll use proceeds from the offering to do deals?
I'm sure it's got to be one of their tools. I haven't seen the roadshow pitch, but I'm sure part of it is for organic growth and another part is for acquisitions. I would think that capital will get put to work pretty quickly.
Realistically, what do you think might happen in the next four years to bank regulation?
What we've seen over the past few months is everyone speculating on how great the reform could be. My expectations probably have moderated. We have to go into this assuming there will be some reform, but it might be more of a changing mindset. I'm sure some reform will come but I don't think it will be as great as everyone anticipates. It might take longer than maybe the market has accounted for to get there. We should all temper our expectations. If we get meaningful reform, that's great; but let's assume it's a changing mindset.
Would a changing mindset still be good for banks?
It's certainly helpful. If you've got a regulatory environment that is more pro-business and trying to find ways to constructively work with the banking industry, to solve problems as opposed to being a disciplinary institution, that's a better working environment for everybody.