Bankers may have to redefine what constitutes a noncore asset if they elect to raise capital through divestitures.
Mounting credit losses and a desire to repay the government's bailout billions are fueling capital needs. But in an increasingly difficult environment for selling stock, and with bank dividends already cut to the bone, observers say some companies may find themselves divesting units they ideally would keep — and for prices they previously would have declined.
"Banks now have to look at selling the crown jewels," said Christopher G. Marshall, a former Fifth Third Bancorp chief financial officer who works as a consultant to the private-equity industry. "It used to be that 'noncore' meant anything that you didn't want, but now it is being redefined as anything you don't need to actually run a bank."
For some companies, observers say, processing, wealth management, and asset management are the "crown jewels" and, for that very reason, are also the operations acquirers want the most. Other companies may take a fresh look at loan servicing and leasing arms, though analysts say the popularity of those units would grow with an economic rebound.
More capital-intensive businesses, such as commercial finance, may be less appealing, because of concerns over credit quality.
Vikram Pandit, Citigroup Inc.'s chief executive, repeatedly said last year that he had no intention of selling his embattled company's brokerage arm, Smith Barney. "We believe the right model is a global, universal bank," he said during an investor conference in May, voicing support for the brokerage business after an "extensive and dispassionate review" of expendable operations.
But last month, as the $2.02 trillion-asset New York company was preparing to report a massive full-year loss, it agreed to sell a 51% stake in Smith Barney to Morgan Stanley for $2.7 billion in up-front cash.
Observers say identifying what to divest is only half the battle; finding buyers in an environment where everyone is looking inward will be just as tough.
BB&T Corp., an active acquirer on many fronts over the years, has declared itself wary of the bank acquisition game in the current environment. And this week Kelly King, the $152 billion-asset Winston-Salem, N.C., company's CEO, indicated that it is now thinking twice about buying wealth management units, as well.
"At one time I thought we could do a rollup in that space, like we did in insurance," he said Wednesday during BB&T's investor day. "I do not think that anymore. For one thing, the multiples are still too high. And I do not think the acquisition opportunities look that profitable today."
Mr. King also set a high bar for other fee businesses. "We are a really tough evaluator," he said. "I'd like to do some fee deals, but they would have to provide substantial, meaningful, highly probable EPS accretion out of the chute."
Richard Bookbinder, the managing member of the New York hedge fund Bookbinder Capital Management LLC, said hedge funds and private-equity firms may have a reduced appetite for acquisitions of distressed assets. "We have a lot of wounded characters right now."
Though the number of deals involving noncore assets rose 23% last year, the overall dollar volume fell 73%, to $4.24 billion, according to data compiled by SNL Financial LC in Charlottesville, Va. The average deal value fell 78.2%, to $61.4 million.
"This is not a market where it is easy to monetize assets," said Jeff Davis, the director of research at Howe Barnes Hoefer & Arnett Inc.
R. Scott Siefers, an analyst at Sandler O'Neill & Partners LP, said it is difficult to create even a pro forma analysis of a processing business, because reduced consumer spending will cut into revenue. Asset management businesses would also be tough to value, since so much wealth has been lost in the stock market and elsewhere since the credit crisis took root, he said.
Beleaguered companies must also decide between raising capital quickly or holding on to a business that is helping support earnings or is keeping a small loss from ballooning into a hefty one.
Fifth Third indicated last summer that it might be willing to sell its processing business to raise capital, though Kevin Kabat, its chairman and chief executive, said in a December interview that the receipt of government capital made such a sale unlikely. Last year the $120 billion-asset Cincinnati company's electronic payment processing revenue rose 11%, to $913 million, remaining a bright spot in a year when Fifth Third lost $2.2 billion.
Dmitri B. Papadimitriou, the president of the Jerome Levy Economics Institute at Bard College, said the definition of core versus noncore depends on a unit's contribution to earnings. "In some instances, you have to balance earnings with survival."
Mr. Siefers cited "an odd conundrum" for companies that do want to sell. "There is all this unrealized value sitting there, but there is a standoff going on. Who knows how it will end, but the weaker players have to hope that their inability to sell certain assets doesn't hurt their ability to survive. If they get past this cycle, then they may be relieved that they didn't sell them."
Another scenario could involve regulators getting more involved with decisions on what is core or noncore.
"The banking model as we speak is being altered dramatically, with bankers getting back to the business of deposits and loans," Mr. Bookbinder said. Citi has said the decision to sell a stake in Smith Barney was its own, but Mr. Bookbinder said the government's proposed stress-test process could lead to more noncore asset sales. "The meaning of stress test is changing from a series of 'what ifs' to one where they may want to know what you're doing to shore up capital."
The Treasury Department did not return a call for comment.