A Merrill Lynch & Co. analyst disputes the widely held view that a flat yield curve is a major driver of consolidation among small banks.
Over the past 20 years such deals did not increase significantly more when the curve was flat, Beth Messmore wrote in a report issued Tuesday. The curve was flat for most of last year and inverted in December.
"Small-cap bank deal premiums to book value appear independent of the yield-curve slope," Ms. Messmore wrote. "Likewise, small-cap banks command similar takeout multiples in a flat yield-curve environment compared to a steeper yield curve environment.
"Fundamental strain resulting from a flat yield curve does not necessarily create a 'buyers market,' " Ms. Messmore concluded.
Among the companies she covers, the $6.3 billion-asset BankAtlantic Bancorp Inc. of Fort Lauderdale, Fla., and the $12 billion-asset Valley National Bancorp of Wayne, N.J., are the likeliest to sell, according to her calculations. In Ms. Messmore's 10-factor model, which includes market dynamics, social issues, and fundamental trends, they each scored 69%.
She wrote that BankAtlantic and Valley National, along with Cullen/Frost Bankers Inc. of San Antonio, have the biggest potential sale premiums over market price among the companies she covers. In general, she wrote, consolidation will be most intense in the Middle Atlantic states, the Northeast, and the Midwest.
Laurie Hunsicker of Friedman, Billings, Ramsey Group Inc. said Ms. Messmore is wrong about the yield curve's influence.
Per-share earnings were flat in the fourth quarter at most of the small and midsize banks she covers, she said Tuesday. "Whenever you run into a wall, usually it facilitates M&A," Ms. Hunsicker said.
The costs of stiffer regulation have also cut into small banks' earnings, she said.
Ms. Hunsicker also disagreed about BankAtlantic as an acquisition target. Its recent ramp-up in marketing and work on a succession plan suggest a company that is not about to sell, she said.
Ms. Messmore wrote that banking M&A will continue "irrespective of yield-curve slope" because the industry "remains highly fragmented, with over 7,500 banks." But Federal Deposit Insurance Corp. researchers recently reiterated the opinion that consolidation in banking is nearing an end.
"The U.S. banking industry is likely to retain a structure characterized by several thousand very small to medium-size community bank organizations, a less-numerous group of midsize regional organizations, and a handful of extremely large multinational banking organizations," according to "Consolidation in the U.S. Banking Industry: Is the 'Long, Strange Trip' About to End?"
The study's authors were Kenneth D. Jones, a senior financial economist, and Tim Critchfield, a senior financial analyst, in the agency's division of insurance and research.
BankAtlantic and Valley National did not respond to requests for reactions to the Merrill Lynch report. A spokeswoman for Cullen/Frost declined to discuss sale speculation.
