California a “seller’s market” for banks, says report

NEW YORK CITY, N.Y.
December 14, 2012 8:01am

California could be one of the nation’s few “seller’s markets” among its more than 240 privately and publicly held banks, most of them community banks, according to a new report released Friday by bank industry advisory firm Invictus Consulting Group LLC.

The report from the New York City-based firm, titled “Buyers & Bleeders,” identifies banks that must or should buy or sell, based on what Invictus calls a comprehensive analysis of their return on capital, taking into consideration how they would perform under stress conditions. The report also identifies banks that need not do anything.

Invictus found that California has the greatest acquisition capacity of any state, with an excess of potential buyers over sellers, and an excess of free capital available among buyers to make acquisitions.

Highlights:

• There are 53 banks in the state that must/should sell and 137 banks that must/should buy another bank, a ratio of 2.6 potential buyers for every potential seller, compared to 1.9 nationwide.

• In Northern California, which includes San Francisco, Oakland, San Jose, Sacramento, and the greater Fresno area, there are 58 potential buyers and 26 sellers, a ratio of 2.2 to 1.

• In Southern California, encompassing Los Angeles, Imperial, Kern, San Diego, Orange, Riverside, San Bernardino, Santa Barbara and Ventura counties, there are 79 potential buyers and 27 sellers, a ratio of 2.9 to 1.

California banks that must or should buy have free capital to make acquisitions of $7 billion, while the “must/should sell” banks have a stressed capital requirement of $2.6 billion, says the report. Thus, potential buyers have 2.7 times the amount of capital required. This is significantly greater than the situation nationwide, where potential buyers have only 41 percent of the stressed capital requirement, it says.

In addition, there are 50 banks in California with an aggregate of $4.4 billion of free capital, Invictus says. Despite the banking environment, these banks are making a sufficient return on stress-tested capital and are not under pressure to do anything. “However, they are ‘wild cards’ in that they could step into the market as opportunistic buyers, competing with the must/should buy banks for the banks that must/should sell,” the report says.

“Given the preponderance of capital available among banks that must/should buy, as well as banks that don’t have to do anything, selling banks in California should do better than most in the country in seeing attractive bids,” says Kamal Mustafa, chairman and CEO of Invictus, and former head of Citibank’s M&A practice. “With an improving economy and a large number of well-capitalized banks, California is in much better shape than the country at large. However, the time for action is now, rather than later.”