The early read on banks' M&A chatter this earnings season: though lending and revenue are creeping up, deal expectations have flatlined.
The heads of a range of banks — JPMorgan Chase & Co., First Horizon National Corp., Webster Financial Corp. and Independent Bank Corp. — offered tempered forecasts on bank mergers and acquisitions in discussing second-quarter results. They said caution has trumped desire when it comes to growing via acquisitions, even as loan losses wane and fee and interest income rises at some banks.
Their downbeat M&A commentary reflected a broader sentiment that the rocky jobs and stock market have become deal-killers that will not fade soon.
"Banks are down year to date," Mark Fitzgibbon, director of research of Sandler O'Neill & Partners LP, said. "It is beginning to widen the disparity between buyer and seller price expectations."
Stable share prices are important because stock is the top deal currency. The KBW Bank Index of the country's largest banks is down nearly 13% for the year and failed to get a sustainable bump from JPMorgan Chase's surprisingly strong profits and revenue gains last week, Fitzgibbon said.
Two of the four banks have the wherewithal to be buyers, analysts say: JPMorgan Chase, the country's second biggest bank by assets, and Independent Bank, a well-regarded community lender based in Rockland, Mass.
Webster Financial, of Waterbury, Conn. and First Horizon, of Memphis, are not quite strong enough to be meaningful buyers but are getting there.
JPMorgan Chase is interested in buying other banks or business lines that could bolster one of its five key operating divisions. But its chairman and chief executive, Jamie Dimon, said the New York banking giant needs clarity on capital as well as worthy takeover targets.
"We don't know the final rules" on capital buffers at giant banks, Dimon said in a conference call with investors and analysts Thursday. "We would certainly use our capital if there were things that we could do that were great for shareholders. … So if you have any brilliant ideas, give us a call."
The $4.8 billion-asset Independent Bank is even better positioned - on a relative basis - to do deals than JPMorgan Chase. It is trading at roughly twice its tangible book value. The median bank in its community banking peer group in the Northeast trades at less than one-and-a-half times tangible book, according to Sandler O'Neill. That gives Independent Bank rare buying power.
Independent Bank's president and CEO, Christopher Oddleifson, told investors Thursday that it would use it sparingly. It can buy, but does not need to grow, he said, having increased business and other types of loans by more than 2% quarter to quarter. Though some analysts have criticized the company for not bidding more aggressively on deals in its region, Oddleifson said the market disruption has enabled it to capture more customers and loans.
"When boards of directors raise their hand and say they want to talk, we'd love to be at the table. Having said that … We are not dependent on growing through acquisition," Oddleifson said.
The $17.8 billion-asset Webster said it wants to engage potential sellers, even if it is not quite ready to do a deal. Still, James Copenhaver Smith, Webster's chairman and CEO, said Friday that deal-making was a secondary priority to reducing expenses, improving profits and increasing its share price.
"Though interested in having discussions … we need to demonstrate that we're a high performer before we go out and start inviting other people into the fold," Smith said.
First Horizon, in turn, said its status as a buyer depends on whether it can best improve earnings per share by using excess capital to make loans, repurchase shares or make acquisitions.
First Horizon CEO D. Bryan Jordan said the second quarter was weak on buybacks and deals: The $25 billion-asset bank did not do any share repurchases, and sellers pricing expectations did not budge.
"The slower growth rate in the economy coupled with increased cost of operation and pressure on fees and spreads would contribute" to more banks seeking buyers," he said during a conference call Friday. "But I don't know that there has been a significant shift in seller expectations during the last 90 days."
