12/17/2011

US banks will merge to survive

Large US regional banks will need to cut expenses by up to 40 per cent to cope with slower economic growth, increasing pressure to cut staff or merge with rivals, a study warns.
The report by Alvarez & Marsal, the turnaround specialists, said returns on equity at leading regional US lenders had fallen by about half from pre-crisis levels of about 15 per cent.
Luring investors back to the sector would require more than routine cost-cutting, it said.
Seamus McMahon, a senior adviser at Alvarez & Marsal, said: “There is no way to take 30 to 40 per cent of costs out of an existing business system.”
Mr McMahon said the resulting merger and acquisition activity would see the number of US banks shrink from 7,500 to 4,000-5,000 in the next 10 years. Only about half the top 50 banks by assets in the US, most of them big regional lenders, would survive, he said.
Joseph Berardino, Alvarez & Marsal managing director, said: “There is simply too much capacity chasing too little demand”.
Lenders face multiple challenges if they are to increase profits. Low interest rates are squeezing their net interest margins. A faltering economic recovery is reducing the demand for loans. Higher capital requirements and restrictions on products are eating into earnings.
As the cost of equity has risen and returns have fallen, shareholders are taking an increasingly dim view of bank stocks. KBW’s indices that track large-cap banks and regional lenders are trading below book value, reflecting concerns.
By 2013 just three of 25 large regional banks will deliver a return on equity higher than the cost of their equity, according to Alvarez & Marsal’s analysis. Only seven of the 25 are now trading above book value.
Companies such as Regions Financial - which is trading at about a third of its book value - and SunTrust Banks - trading at about half its book value - will be among those facing pressure either to pare back their operations significantly or merge with competitors. Many already have announced cost-cutting measures to placate investors.
From 2002 to 2006, banks’ ROE was about twice as high as their cost of equity capital, according to Alvarez & Marsal. Since 2008, the cost has exceeded the return, a trend that is forecast to continue until 2013.
Kevin Fitzsimmons, who covers regional banks for Sandler O’Neill, said: “Cost is a focus because it’s one of the few levers under manage-ment’s control.”


European leaders met with President Barack Obama Monday at the White House to figure out how to avoid another worldwide economic collapse.
Obama is pressuring the 17-nation European Union to resolve its banking and debt crises before they drag down the U.S. economy’s shaky recovery from recession.
"This is something they need to solve and they have the capacity to solve, both financial capacity and political will," White House press spokesman Jay Carney said Monday.
At the same time, the European Union is trying to show the United States and other countries that it is managing its economic problems appropriately as the Europeans seek foreign investment.
Few details of the meeting were released publicly after U.S. and European officials said they preferred to keep the negotiations private.
However, they gave a glimpse of what would be discussed in statements before the meeting.
“We need also to develop a transatlantic agenda to growth and jobs,” European Commission President Jose Manuel Barroso said.
He hinted that new regulations could be coming on U.S. and European trade when he said, “…we will also be discussing how to increase our international cooperation and build a stronger and fairer rules-based system.”
The meeting Monday was one of several recent discussions between Obama and European economic leaders.
He has telephoned Italian Prime Minister Mario Monti and Greek Prime Minster Lukas Papademos to talk about strategies for avoiding economic collapse.
First Greece, Ireland and Portugal were facing default on their debt, beginning about two years ago. Now Spain, Italy and France are facing the same kinds of problems.
Obama has called the European debt crisis one of the greatest threats to the U.S. economic recovery.
The European Union’s primary method of handling its debt crisis is through the $440 billion euro European Financial Stability Facility, which provided emergency bailout loans to Greece, Italy and Ireland in exchange for concessions on how their budgets are structured.
European economic ministers still are trying to figure out how they will protect government bond markets.
Foreign investment from the United States could be one of the backstop funding sources they seek.
They also are considering allowing the European Central Bank to buy out at-risk national debt as the lender of last resort for member countries and their banks.
However, advocates of the proposal must overcome opposition from Germany, which has Europe’s largest economy.
Among European economic leaders at the meeting Monday with Obama was European Council President Herman Van Rompuy.
“We will both need to take action to address the near-term growth concerns as well as fiscal and financial vulnerabilities,” Van Rompuy said. “Together, we will also look for ways to use our very strong economic ties for creating growth and jobs on both sides of the Atlantic.”
The meeting at the White House comes less than two weeks before the European economic leaders are scheduled to discuss tighter controls over budgets of European Union member nations.
At the Dec. 9 meeting, Germany, France and Italy are expected to take the lead in a move to change the treaty that governs the European Union.
Their proposed revisions would force member nations to submit to frequent audits of their economic policies and to ask for agreement from other European nations before seeking outside financial assistance.
The proposals would be the broadest rewrite of Europe’s economic policies since the European Union was formed in 1967.