Bank Consolidation - Under the Hammer

LIKE plane-crash survivors forced to eat their fellow passengers, investment bankers have found some sources of nourishment amid the wreckage of the banking industry. Goldman Sachs notched up a 72% increase in equity-underwriting revenues in the second quarter, much of it from other banks. Now many have their eyes on M&A deals.

Why banks need to consolidate?

Weaknesses in funding and business models have been laid horribly bare. Some banks were too focused on the wrong markets. Wachovia, America’s fourth-largest bank, has suffered from outsize exposure to California’s imploding housing market and is a potential takeover target. Others face regulations that threaten their profits. Lehman Brothers is at the centre of many of them.

Problems for Buyer

More importantly, buyers are scarce. - Deutsche Bank is under pressure to bring down its leverage ratio. Barclays raised £4.5 billion ($9 billion) in June, but is still more thinly capitalised than many of its peers. HSBC has been burnt by its disastrous acquisition of Household.

Due diligence on banks structured-credit exposures remains a nightmarish prospect for would-be acquirers.

Liquidity is also now a big part of buyers’ calculations. Few want to bump up the amount of debt that needs to get rolled.

Accounting standards add to the complexity, by requiring acquirers to account for the assets and liabilities they buy at fair value.

Regulators themselves may set up roadblocks to deals, either because they take a generally dim view of capital-sapping acquisitions or because of the rules.

Banks Present Status

Banks’ need for capital is not yet satisfied and there is mounting concern that investors are less willing to inject cash into sinking assets. Disposals are the obvious escape route. Bidding is under way for Citigroup to offload its German retail operations.

The big question, of course, is whether that will keep bank finances shored up long enough for markets to stabilize. If losses continue to spiral, capital dries up, and disposable assets cannot find purchasers, banks will have little choice but to cut back even harder on lending, or to take whatever price they can get.