banking industry market update
TRANSCRIPT
This document is confidential and is
intended solely for the use and information
of the SNL Financial and the individual, group,
or corporation to whom it is addressed.
Banking industry updatePrimatics Financial Risk and Finance Banking Industry Event, June 18,
2014 — Chicago, Ill.
Bank Fundamentals
Bank M&A Trends
Regulatory and Accounting Policy Update
2
Agenda
Bank Fundamentals
3
Bank Fundamentals Remain Challenged
4
• Despite some encouraging signs, bank loan growth remains weak
• Deposit growth has outpaced loan growth
• Banks have continued to rely on securities portfolios for income
• Margins are compressed – loan growth is weak, low rates are
pressuring earning asset yields, funding costs can’t decline much further
and banks are sitting on excess liquidity
Deposit Growth Outstripping Loan Growth
5
• Deposit growth
has far
outpaced loan
growth over
the last four
years
• Loan-to-
deposit ratio
down to 70.1%
at Q1’130
10
20
30
40
50
60
70
80
90
100
0
1
2
3
4
5
6
7
8
9
10
11
12
Q1
'03
Q3
'03
Q1
'04
Q3
'04
Q1
'05
Q3
'05
Q1
'06
Q3
'06
Q1
'07
Q3
'07
Q1
'08
Q3
'08
Q1
'09
Q3
'09
Q1
'10
Q3
'10
Q1
'11
Q3
'11
Q1
'12
Q3
'12
Q1
'13
Q3
'13
Q1
'14
Loan
/de
po
sit
(%)
Loan
, de
po
sit
($T)
Loan ($T) Deposit ($T) Loan/deposit (%)
Banks More Reliant on Securities for Income
6
10
12
14
16
18
20
22
56
58
60
62
64
66
68
Med
ian
to
tal s
ecu
riti
es/a
sset
s
Med
ian
to
tal l
oan
s an
d le
ase
s/as
sets
Securities, loans at US banks & thrifts (%)
Median total loans & leases/assets Median total securities/assets • Flush with
excess liquidity,
banks have
invested
deposits in
securities
• Securities have
grown to ~21%
of assets from
16.6% four
years ago
Banks Still Buying Rate Sensitive Assets
7
-15
-10
-5
0
5
10
15
20
25
30
35
0
100
200
300
400
500
600
(%)($B)Total govt. securities ($B) Median govt. securities/total securities (%) Growth since Q1'10 (%)
Banks Still Buying Rate Sensitive Assets
8
1,480
1,490
1,500
1,510
1,520
1,530
1,540
1,550
1,560
1,570
Q1'13 Q2'13 Q3'13 Q4'13 Q1'14
Total RMBS ($B)
Banks Have Increased Exposure to Munis
9
0
10
20
30
40
50
60
70
80
90
0
50
100
150
200
250
300
Q1'10 Q2'10 Q3'10 Q4'10 Q1'11 Q2'11 Q3'11 Q4'11 Q1'12 Q2'12 Q3'12 Q4'12 Q1'13 Q2'13 Q3'13 Q4'13 Q1'14
($B)(%)
State & municipal securities ($B)
Median state & municipal securities/total securities (%)
Aggregate state & municipal securities growth since Q1'10 (%)
Banks Preparing for Higher Rates
10
• Banks have put more
and more bonds into
held-to-maturity
portfolios, which are
not subject to mark-to-
market adjustments on
a quarterly basis
• If rates rise, banks
can’t replace those
bonds with higher-
yielding bonds
2,000
2,500
3,000
3,500
4,000
4,500
5,000
5,500
200
250
300
350
400
450
500
550
Q1'12 Q2'12 Q3'12 Q4'12 Q1'13 Q2'13 Q3'13 Q4'13 Q1'14
AF
S (
$B
)
HT
M (
$B
)
HTM AFS
Funding Costs Can’t Go Much Lower
11
• Banks’ cost of
deposits
reached a 10-
year low in Q1
• Little room left
to lower costs
from current
levels
• Costs likely to
rise if rates rise
— change in
long-term rates
could even
move costs
higher
0.00
0.50
1.00
1.50
2.00
2.50
3.00
3.50
4.00
4.50
5.00
(%)
Cost of deposits at banks and thrifts
Cost of int. bearing transaction accounts*
Cost of savings accounts (including MMDAs)
Cost of >$100K time deposits
Cost of <$100K time deposits
This document is protected under the copyright laws of the US and other countries as an unpublished work. This document contains information that is proprietary and confidential to Primatics
Financial LLC, and by accepting receipt of this document the recipient agrees not to disclose, or to otherwise duplicate or use, this document or its contents in whole or in part for any purpose other
than in connection with services or deliverables to be delivered by Primatics Financial LLC. Any use or disclosure in whole or in part of this information without the express written permission of
Primatics Financial LLC is prohibited.
© 2014 Primatics Financial LLC – All rights reserved. 12
Bank M&A Activity
13
Drivers of Bank M&A
• Challenging earnings environment plagued by low growth, low rates and heightened regulatory costs
• Need for scale
• Sellers seeing upside post deal in the right transactions
• Board and management fatigue taking a toll
• Regulators only allowing few banks to pursue acquisitions and even fewer to land multiple deals
• Deal approval process taking longer, particularly for larger institutions and larger deals
14
This document is protected under the copyright laws of the US and other countries as an unpublished work. This document contains information that is proprietary and confidential to Primatics
Financial LLC, and by accepting receipt of this document the recipient agrees not to disclose, or to otherwise duplicate or use, this document or its contents in whole or in part for any purpose other
than in connection with services or deliverables to be delivered by Primatics Financial LLC. Any use or disclosure in whole or in part of this information without the express written permission of
Primatics Financial LLC is prohibited.
© 2014 Primatics Financial LLC – All rights reserved. 15
Bank M&A by Region
16
Regional bank and thrift deal statistics, 2014 YTD
Number of deals
Total deal
value ($B)
Median deal value/ tangible
book value (%)
Northeast 4 0.18 193.00
Mid Atlantic 8 0.56 108.83
West 11 0.36 119.00
Southwest 21 1.02 148.66
Southeast 26 1.72 123.77
Midwest 38 0.71 145.01
National 108 4.55 137.96
Data as of June 2, 2014.
Year-to-date data is between Jan. 1, 2014 and May 31, 2014.
Includes bank & thrift whole-company deals in which the target is based in the U.S.
Excludes terminated deals.
All metrics are as of announcement date.
Source: SNL Financial
Regulatory & Accounting Update
17
Regulatory Deal Approval Process Taking Longer
18
• Many bankers say deal approval process is taking longer than they expected
• Larger deals are taking longer to close. Larger buyers may face a longer closing process
• Regulatory focus on compliance, BSA/AML, consumer issues such as CRA
• Bankers say regulators want far more information. Encourage communication early in the process
Since 2011, deals over
$100M have taken on
average 197 days from
announcement to close,
or nearly 57 days longer
than smaller deals.
From 2005 -2007, deals
over $100M took just 162
days to close on
average, or 20 days
longer than smaller deals
General Regulatory Issues
19
• Heightened expectations
• Interest rate risk
• UDAAP & Fair lending
• BSA / AML
• Basel III implementation
• Volcker implementation
• CFPB regulating banks over $10B but
its influence is being felt by smaller
banks
• Stress testing: Smaller banks
beginning the exercise much earlier –
some voluntarily, some at the behest of
regulators
• Banks increasingly say they need to be
$15B to $20B in assets to absorb the
cost of moving above $10B in assets
Basel III Implementation
20
• Most banks
largely prepared
to comply with
Basel III from a
capital standpoint
• The complexity of
Basel III’s
reporting
standards could
be the greatest
challenge
Final Rules:
Aggregate deficit if Basel III was fully implemented
today
Excludes institutions over $250B and BHCs less than $500M in assets.
Amount ($B) Percent of RWAs (%)
Moderate Conservative Moderate Conservative
Banks with $15B - $250B in assets 0.00 0.06 0.00 0.23
Banks with <$15B in assets 0.88 1.35 1.48 1.12
Total deficit 0.88 1.41 1.48 0.97
Median years to meet Basel III
requirements through earnings 0.91 0.90
Average years to meet Basel III
requirements through earnings 2.75 2.44
Final Rules:
Number of banks, thrifts possibly below Basel III minimum
requirementsExcludes institutions over $250B and BHCs less than $500M in assets.
Moderate Conservative
Q4'13 Q4'13
Banks with $15B - $250B in assets 0 2
Banks with <$15B in assets 139 210
Total number of companies 139 212
This document is protected under the copyright laws of the US and other countries as an unpublished work. This document contains information that is proprietary and confidential to Primatics
Financial LLC, and by accepting receipt of this document the recipient agrees not to disclose, or to otherwise duplicate or use, this document or its contents in whole or in part for any purpose other
than in connection with services or deliverables to be delivered by Primatics Financial LLC. Any use or disclosure in whole or in part of this information without the express written permission of
Primatics Financial LLC is prohibited.
© 2014 Primatics Financial LLC – All rights reserved. 21
Volcker Rule Implementation
22
• Generally prohibits proprietary trading, investments in hedge
funds, other “covered funds”
• Provides limited exemptions for securities underwriting,
market making and hedging
• Banks must maintain well-documented compliance programs
— the bigger the bank, the bigger the compliance burden
• Allows banks to continue to invest in U.S. govt, agency, state
and municipal obligations
Volcker Rule Implementation
23
• Prohibits holding some securities currently in banks’ investment portfolios
• Most CLOs issued before final Volcker rule would be disallowed since
they usually have bonds in the structures
• Banks owned $72.63B in CLOs at Q1, nearly flat with the prior quarter
• Large banks are the by far the biggest buyers in CLO market — own
~80% of all CLOs owned by banks
• Banks recently received a 2-year extension – bittersweet because banks
hoped that CLOs could be grandfathered
Stress Testing
24
• All banks but
Zions passed
the recent
DFAST. Four
failed CCAR
due to
qualitative
concerns
• Focus on
process
undertaken
by institutions
rather just
capital levels
Accounting Update — Change to Bank Impairment
Model
Known as the Current Expected Credit Loss, or CECL Model
25
• Proposed in Dec. 2012
• Requires banks to reserve for current expected credit losses opposed to setting aside reserves when there is a triggering event and losses are probable or already had been incurred
• Bankers have not liked the proposal. They believe it will increase reserves
• FASB still deliberating and considering comments – believes that assets measured at amortized costs should use CECL model. If fair value equals or exceeds amortized cost basis, banks should not use CECL
Bankers, Investors View of CECL
26
• SNL surveyed bankers and
investors about the impact of
CECL last year
• ~85% of bankers expected
reserves to increase. ~50% of
bankers believed reserves
would increase by 25%. ~20%
expected reserves to rise by
50%
• ~95% of investors expected
reserves to increase. ~20% of
investors expected reserves to
rise by 25%. ~30% believed
reserves would increase by
50%. ~25% predicted that
reserves would double
SNL’s Analysis of CECL Survey Results
27
• Reserve increases on the order of 25% to 50% would require
sizable builds on bank balance sheets
• Those reserve increases would cause commercial banks'
aggregate reserves to increase by $38.02 billion and $76.03
billion, respectively, according to SNL's analysis
• Those reserve increases would result in respective Tier 1
capital decreases of 3.3% and 6.6%, according to SNL's
analysis
28
Nathan Stovall
Senior Editor and New York Bureau Chief
SNL Financial
212.341.7304
Contact
Primatics Financial Risk and Finance Banking Industry Event, June 18, Chicago, Ill.