Sticker shock over a recent deal in Texas has left the heads of some prominent — and generally acquisitive — banks uttering assurances they'd walk away from something similar rather than risk overpaying.
PNC Financial Services Group Inc., Huntington Bancshares Inc. and Fifth Third Bancorp on Thursday offered especially tempered guidance on acquisitions as they confronted skeptical market reaction to Comerica Inc.'s surprise $1.03 billion deal for Sterling Bancshares Inc. of Houston. While the three are scoping prospective deals across the Midwest, their top executives all said they favor expanding the safe and old-fashioned way: By attracting more customers and selling them as many different loans and services as possible.
The unifying message at all three — and at U.S. Bancorp earlier in the week — was that acquisitions are a secondary priority in their strategic plans. Expensive purchases don't even make the list.
James Rohr, the chief executive of PNC, which is based in Pittsburgh, said that raising the dividend, repurchasing stock and cross-selling are "really No. 1, 2 and 3 for us. Secondly, if there are fill-in acquisitions," it would consider them.
PNC — having passed on more than 40 failed-bank deals — is not rushing into any deal where it cannot get "the right risk-adjusted return," Rohr said. The opportunities for doing so in large deals are scant, he said.
"We've been careful," Rohr said. "I think the opportunity for us to buy large banks is, to a great extent, limited. Not that any of them are for sale. But a lot of that is quite limited."
A scarcity of opportunities was a rationale Comerica used in justifying its price for Sterling, which was valued at 2.3 times the target's tangible book value (essentially all of its equity minus intangibles like goodwill). Comerica said there just aren't a lot of other sizable banks for sale in the highly desirable Texas region, making Sterling more valuable. In December, buyers agreed to pay 1.4 times book for Marshall & Ilsley Corp. of Milwaukee, and 1.7 times book for Whitney Holding Corp. of New Orleans.
Even those prices caught analysts — and a few bankers — off guard. Before the downturn, typical bank deals were valued at around two times to 2.5 times tangible book, with especially attractive companies fetching three times book or more.
Comerica is getting "punished" for paying "more of a traditional price," said Gary B. Townsend, the CEO of Hill-Townsend Capital LLC. "One way to look at it is: 'Gosh, things are getting expensive,' " he said. "On the other hand, it says something about the intrinsic value of these institutions."
"It's very surprising to me how quickly [valuations have] bounced back," Stephen Steinour, the CEO of Huntington, of Columbus, Ohio, said in an interview. "We're not feeling any pressure or any reason to be compelled to get in the M&A game at some of the levels we're seeing."
He said some recent transactions are actually worth more than three times book value when some buyers' huge loss assumptions are factored in. M&I, now betrothed to Bank of Montreal, is expected to lose $9.5 billion, or 21% of its loans, for example.
Three times book value is "rich by historical standards," Steinour said.
Huntington is open and able to do deals, having just returned its federal aid. It's hired a batch of people that specialize in buying and integrating other banks. It's also getting more feelers from ailing Midwest banks. However, "organic growth remains our priority," Steinour said.
That sentiment was echoed by Fifth Third and U.S. Bancorp.
With the announcement of its plans to finally return its bailout money, Fifth Third, of Cincinnati, is now on the lookout for "opportunistic, but disciplined evaluation of M&A opportunities," Dan Poston, its chief financial officer, told analysts.
Richard Davis, the CEO of U.S. Bancorp, told analysts on Wednesday that the bank will keep its eyes open for "a good deal out there at the right price."
"We will not get greedy and try to price them if we think we're in a pricing war, just to win one, because that would be a mistake that this management team is not going to make," he said. "And I'd rather you were disappointed we didn't win something than to be disappointed that we won it at the wrong price."