Bank merger action has been slower this year than last, but some analysts believe there is still room for consolidation in the thrift sector.
On Thursday, analysts from Royal Bank of Canada's RBC Capital Markets unit held a conference call to discuss bank and thrift M&A activity. It was partly inspired by Sunday's announcement that the credit card issuer Capital One Financial Corp. of McLean, Va., had agreed to buy Hibernia Corp. of New Orleans for $5.3 billion.
Capital One had been talking about buying a bank for some time. On Monday it said Hibernia would diversify its revenues and provide a source of cheaper funding.
According to Highline Data LLC, there have been only 28 banking deals announced this year, mostly involving community banks. The largest is the Cap One-Hibernia deal.
Last year' 258 bank deals set a record, according to RBC analyst Gerard Cassidy.
But his colleague James Ackor said there are still deals to be done among thrifts.
"Conditions are right for an increase in thrift M&A," said Mr. Ackor. He cited Independence Community Bank Corp., a $17 billion thrift company based in Brooklyn, N.Y., as a likely target. Independence Community "clearly has some takeover premium" built into its price-to-earnings ratio, he said on the conference call Thursday morning.
"In the environment we're in right now, the pressure on fundamentals for thrifts is much more severe" than for banks, said Mr. Ackor. If the yield curve continues to flatten, the Federal Reserve continues to raise short-term rates, and thrift fundamentals get bad enough, "that will ultimately drive some of these thrifts to the table." And the sector has lower premiums than the banking sector.
Mr. Ackor named Astoria Financial Corp. of Lake Success, N.Y., as another possible takeover target this year. "Thrifts which tend to be naturally liability sensitive are not enjoying this [interest rate] activity at all," he said.
Independence has repeatedly said that it is not for sale; Astoria did not return a phone call seeking comment Thursday.
Mark W. Batty, an analyst with PNC Advisors, said merger action among regional banks has been slow this year and will likely continue that way, because they are still trading at extraordinarily high prices.
One catalyst for more deals in this sector could be continuing pressure on earnings, which could materialize later this year, he said in an interview Thursday.
Large premium deals appear unlikely in the first half of this year, wrote Matthew D. O'Connor, an analyst with UBS Securities LLC, a subsidiary of UBS AG, in research note that weighed in on the topic Wednesday. Buyers should be patient, because there will be more earnings risk among potential sellers than buyers yet there is little pressure to sell right now, he wrote.
Mr. O'Connor wrote that Sovereign Bancorp Inc. of Philadelphia and Cleveland-based National City Corp. are the two most likely acquirers, while another Cleveland company, Huntington Bancshares Inc., is the most likely to sell over the next year.
On Thursday, both Sovereign declined to comment on the Mr. O'Connor's note, while Huntington Bancshares did not return phone calls seeking comment. National City said it would continue to look at deals that make sense.
Another factor hindering deal activity, said RBC's Mr. Cassidy, is that a number of buyers must digest their newly acquired banks before showing interest again.
Two notable examples are JPMorgan Chase & Co., which bought Bank One Corp. in July of last year, and SunTrust Banks Inc. which bought National Commerce Financial Corp. in October.
Joseph Morford, RBC Capital Markets' West Coast analyst, said that because many western banks are having good revenue growth and are naturally asset sensitive, "there is not as much pressure to sell." However, some could be acquisition targets for their large, low-cost deposit bases, much like the $22 billion-asset Hibernia.
