Time for Sellers to Get Real

If you're selling a bank, you better start lowering your asking price.

Sure, you got excited by how much Comerica Inc. agreed to pay for Sterling Bancshares Inc. (2.3 times tangible book value) in January. PNC Financial Services Group Inc. seems to be gobbling up everything in sight, and First Niagara Financial Group Inc. is willing to go to the markets to pay for its recent deal for HSBC Holdings PLC's upstate New York branches.

But a lot has changed in recent weeks, especially since the market tanked on Thursday. That was a momentary flashback to 2008 and a real confidence-drainer. Yes, the Dow Jones Industrial Average gained 61 points Friday on news that U.S. employers added 117,000 workers in June.

But come on. Investors have dialed back the Dow Jones average to last winter. Unemployment is still high and there's a lot of talk again about a double-dip recession. Nor can anyone forget that healthy backlog of foreclosure proceedings ready to pummel the still wobbly housing market.

"The economic soft patch we are in right now certainly should bring expectations a little lower for sellers," Chris McGratty, vice president of equity research at Keefe, Bruyette & Woods, said on Friday. "Banks need to understand where they've come from and the headwinds in front of them."

The wave of deals has not swelled as high as predicted this year, in part because of a stalemate over asking prices.

Bryan Jordan, chief executive of First Horizon National Corp., put it diplomatically in a conversation with analysts in July.

"I don't know that there has been a significant shift in seller (pricing) expectations during the last 90 days," he said.

That was so July. The economic outlook in August has turned bleaker.

Still, dear sellers, we know you will fight hard to hold out like stubborn homeowners in a former boomtown gone bust.

"My sense is, at least in the short term, they'll [potential bank sellers] say 'We'll wait'" and hope the economy strengthens, said Bert Ely, a financial services consultant in Alexandria, Va.

Biding time may be tough. Regulators could increase pressure on weak banks to sell or raise money. "Raising capital in this market is going to be much harder," Ely said.

As PNC and JPMorgan Chase & Co. and others expand into troubled states, like Florida and Georgia, the pool of buyers will be reduced to smaller cost-conscious players.

Life won't be easy for buyers either, but they seem to have the upper hand. KBW's McGratty terms a "massive consolidation" inevitable. "It's a matter of when, not if," he says.

That leads back to my original point: Sellers who fail to yield in a game of chicken risk losing it all.

Do you think sellers will start lowering their asking price? Should they?