The Washington area recorded few bank mergers and acquisitions in the past three years, compared with other parts of the country. Locally-based institutions weathered the downturn fairly unscathed, though there were a few notable unions, namely McLean-based Capital One Financial’s acquisition of Chevy Chase Bank.
Industry experts are divided about whether the trend of little activity will reverse amid the next wave of mergers and acquisitions. Capital Business asked four local banking experts to weigh in on the subject:
The Washington [metrpolitan area] is not going to be ranked at the top in terms of M&A because right now there are more opportunities to go into markets where there’s stress to acquire more accretively.
That’s not to say you can’t find the right deal, at the right price, in the right market. Paying for a very nice institution in the right market that has growth prospects might be a whole lot better than paying a very cheap price for someone that doesn’t have growth prospects, particularly if we don’t come out on the other side of the cycle on an upward trend.
With that in mind, I would argue that other markets are more likely to see more activity than D.C.
Bank mergers are inevitable. Congress has limited fee income and the Federal Reserve has compressed net interest margins. So the only way to cope is through economies of scale and that means getting bigger.
The real issue is when the M&A wave will start? If history is any guide, it will occur when Washington shifts to deregulation from over-regulation. And that should be after the 2012 election when we expect Republicans to control Capitol Hill.
Strength is measured based on capital. The issue is the ability to earn a return on capital, which is tougher when net interest margins are compressed and non-interest income restricted.
That said, Washington is a unique place because the federal government tends to limit economic downturns. That is why the banks here performed relatively well over the crisis compared to banks in other regions. Yes, we had failures. But this was no Georgia or California.
Banks in Washington are generally healthy and doing well in a down economy. But the valuations are not up to a level that would make them want to exit. I don’t see banks exiting, except in certain limited distress situations, of which there are very few in the Washington area.
Compliance costs put pressure on the banks and restrain earnings, but by itself these are not reasons for a sale.
Banks are going to be under a lot of cost-and-revenue pressure over the next few years because of the very low interest rate environment, the negative impacts on their fee income and the cost of compliance with all of the regulations coming along. A lot of bankers, here and across the country, are going to look at their situation and say, “We can’t make a good return on our capital” and they’ll sell out.
I think we’ll see more consolidation within the community banking sphere. It might be the $200-million bank acquiring the $50-million bank or the $1-billion bank acquiring the $250-million bank. Just look at EagleBank’s acquisition of Alliance.
It’s become a very tough environment for a small bank to operate, particularly in a large metropolitan area. Where the tip off in this will come is when we see weak earnings. You may have a bank that is pretty strong in terms of capital, but if it’s only making a 5 percent return on equity. Stockholders are going to look at it and say, “What’s the point? We ought to put our capital in another industry.” This is going to be a tough environment in which to make money for the next few years.