In the banking industry these days, failure can be good news.
Being taken over by the Federal Deposit Insurance Corporation, or FDIC, is never good for a failed bank. It can be excellent news for the bank chosen by the FDIC to acquire its prey.
In November, East West Bancorp (EWBC) in Pasadena, Calif., won the bidding to take over failed San Francisco-based United Commercial Bank, its $9.9 billion in assets, and $6.5 billion in deposits. Over the next five days, East West's stock jumped 55.7%.
FDIC-facilitated buyouts of failed banks have become a major factor driving bank stocks. According to an analysis that SNL Financial conducted for Bloomberg BusinessWeek, there have been 24 government-assisted buyouts of banks with more than $500 million in deposits since July. Eight produced double-digit stock gains in the five days of trading that followed the announcements. In 10 further cases, the acquirers' stocks beat a broad, SNL-developed index of banks and thrifts.
To attract bidders for failed banks, the FDIC sweetens deals by taking part of the credit losses incurred by buyers. The government agency generally pays for 80% of losses up to a certain threshold, and 95% above it. By acquiring failed institutions through the FDIC, banks also win strategic and financial advantages.
For example, on Dec. 4, New York Community Bank (NYB), whose operations were previously confined to New York and New Jersey, acquired the $11 billion in assets and $8.2 billion in deposits of Cleveland-based AmTrust Bank. With branches in Ohio, Florida, and Arizona, AmTrust elevated its acquirer's assets by 28%, loans by 26%, and deposits by 55%. The deal is so beneficial to earnings that New York Community was able to issue 60 million shares, raising $780 million, without diluting its earnings per share, says Peter Winter, a banking analyst at BMO Capital Markets.
The deal "really strengthened the balance sheet," Winter says. In five trading days after the deal was announced, New York Community shares beat the SNL Bank & Thrift index by 8.7 percentage points.
The strategic benefits of FDIC-sponsored deals can be as compelling as the financial boost they provide. "It can enable a bank to overnight pick up a franchise or be in a geography" that could otherwise take years to build, says Raymond James (RJF) analyst Michael Rose.
IberiaBank (IBKC), based in Lafayette, La., bought Century Bank, based in Sarasota, Fla., on Nov. 13. "Overnight, they became the 20th-largest bank operating in Florida," Rose says. "Florida was the place they wanted to be." After the economy recovers, Florida should be fertile ground for banking, with less competition after so much hardship, he says.
The benefits of FDIC-enabled transactions are so clear that many analysts and investors are busy trying to predict which companies will get to gobble up the next big failures. Even a brief slowing in the pace of FDIC bank takeovers threatens to hurt bank stocks. In a Feb. 16 note, Frederick Cannon, a Keefe, Bruyette & Woods (KBW) banking analyst, said that after 15 bank failures in January, the casualty rate slowed in February to one small, $18-million swan dive.
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