If Royal Bank of Canada's deal to buy City National Bank proved anything, it's that buyers will pay top dollar for banks that cater to the wealthy.
So don't be surprised, investment bankers say, if other banks that serve high-net-worth clients including First Republic Bank, Boston Private Financial Holdings and Signature Bank soon find themselves fielding offers that they may find difficult to refuse.
All have attractive deposit franchises and high-quality loan portfolios and, importantly, are small enough to be absorbed relatively easily by larger players. San Francisco-based First Republic and Boston Private also have thriving wealth management units that generate significant fee income.
"Right now, private wealth is the most profitable thing a bank can do," said Paul Miller, an analyst at FBR Capital Markets.
Royal Bank of Canada announced last month that it was buying the $33 billion-asset City National in Los Angeles for $5.4 billion, or about 2.7 times the seller's book value.
But according to a report in the Wall Street Journal Friday, Royal Bank of Canada held merger talks with both the $47 billion-asset First Republic and the $6.5 billion-asset Boston Private before striking a deal with City National. Citing anonymous sources, the paper also reported that Canadian Imperial Bank of Commerce had also approached Boston Private.
Investors seemed to delight in the news that First Republic might be open to selling itself. The bank's shares briefly hit a 52-week high Friday before retreating in the afternoon, to close at $55.23.
Miller said he's not surprised that First Republic would be on a buyer's wish list or that the management would engage in merger talks.
"The management team has been the same for about four years and they're now of a size that they'll have more compliance costs," Miller said, referring to First Republic's plan to soon surpass the $50 billion-asset threshold and thus become a systemically important financial institution.
"Their business model is a very good model that other entries would love to get a hold of," he added. "It's probably time for these guys to cash out."
While First Republic isn't the largest institution in terms of generating wealth-advisory fees or income from fiduciary activities, it's got what many banks covet: a high-net-worth clientele. Its customers are largely urban professionals, the firms and businesses for which they work and the nonprofits they support.
"There is no doubt that First Republic has an enviable platform," said Matthew Clark, an analyst at Sterne Agee.
The Wall Street Journal did not say why negotiations between Royal Bank of Canada and First Republic ended without a deal.
Greg Berardi, a First Republic spokesman, declined to comment.
Boston Private could be a target because it has an attractive business, said Chris Marinac, an analyst at FIG Partners. But it also has the wherewithal to remain independent.
"Make no mistake, [Boston Private] has a real business and they do not have to do anything different," Marinac said. "Staying independent and booking [their current levels] of retained earnings and returns on assets and equity is certainly not a bad alternative."
In the fourth quarter, Boston Private reported a return on assets of 0.71% and a return on equity of 6.97%.
Steven Gaven, a Boston Private spokesman, declined to comment.
If a Canadian bank wants to expand in the U.S. and reach wealthy clients, it probably couldn't do better than the $26 billion-asset Signature Bank in New York, said Anthony Polini, an analyst at American Capital Partners.
"Signature is a great franchisehigh-growth, high-profitability, self-sustaining and they can raise so much in low-cost deposits," Polini said.
It's unclear whether Signature Bank would look to put itself up for sale, Polini said. Additionally, a change in ownership might hurt Signature Bank's franchise value, he said.
"It's such a simple, unique business model, yet it's a tough one for anyone who is a control freak to not want to change," Polini said.
Susan Lewis, a Signature Bank spokeswoman, declined to comment.
Several other banks with sizable operations in private banking or wealth management could also prove attractive to acquirers, analysts said. Those include the $69 billion-asset Comerica in Dallas and the $16 billion-asset UMB Financial in Kansas City, Mo.
Meanwhile, plenty of banks of all sizes are looking to improve their ability to serve wealthy clientele. Earlier this month, for example, the $29 billion-asset BOK Financial in Tulsa, Okla., hired a wealth management team from Denver Retirement Partners.
What bankers want, above all, is to sell multiple products to a single, deep-pocketed customer, said Aaron James Deer, an analyst at Sandler O'Neill.
"There is a lot of value in those relationships with high-net-worth clients and by capitalizing on and cross-selling those relationships," Deer said.