Loan growth is a zero-sum game.
That's the conclusion reached by analysts at D.A. Davidson after listening to presentations from nearly 30 West Coast banks and thrifts at an investor conference the firm hosted in Seattle this week.
Many banks reported strong loan production in the first quarter, but most bankers acknowledged that overall loan demand remains tepid and that the activity is largely a result of stealing business from rival banks. Overall, loan portfolios have remained relatively flat as many banks continue to let construction loans run off and replace them with more desirable commercial and industrial loans.
"Loan growth remains an exercise in taking business away from competitors, with the resultant pricing competition on loan yields and margins," analysts John Kraft, Jeff Rulis and Gary Tenner wrote in their wrap-up of the conference. "Even banks with strong loan production are doing little more than treading water on portfolio balances unless they are in a particularly differentiated line of business."
The analysts said that more banks are well positioned to add to their loan books as they shift loan officers away from credit workouts back to loan production. But Rulis said in a follow-up interview that, for now, he expects mergers and acquisitions to be the primary driver of asset growth.
"If banks are seeing any increase in the size of the balance sheet it's from deals," Rulis said. "Growth from M&A" — as opposed to organic growth — "is the better bet in the near term."
The analysts foresee a surge of merger and acquisition activity on the horizon. Several presenting chief executives reported an increase in phone calls from smaller banks looking to pair up and the analysts said that "if that level of contact is any indication, we think that it is likely M&A announcements pick up speed over the remainder of 2012."
One company singled out as a possible acquirer is Hanmi Financial (HAFC) in Los Angeles. The $2.8 billion-asset Hanmi was once the largest of the roughly one-dozen Korean-American banks in Los Angeles, but that title is now held by the $5.2 billion-asset BBCN Bancorp (BBCN), which was created last fall when rivals Nara Bancorp and Center Financial merged.
The analysts said in their note Friday that they expect Hanmi — which was hit hard by the real estate bust — will be free of enforcement orders by the end and will soon recover its deferred-tax asset valuation allowance, which would significantly add to its capital base.
"We expect [Hanmi] to have options in returning capital to shareholders via dividends or stock buybacks and believe there will be M&A opportunities to take advantage of the Korean-American bank space," they wrote.