September 30, 2005

A Thought For The Weekend: Why Bank Acquisitions Fail To Meet Growth Expectations

Great and provocative article by Jim McCormick and Gordon Goetzmann of First Manhattan on why bank acquisitions frequently founder on the rocks of poor organic growth.

New FMCG analysis shows that a key reason many bank acquisitions fall short of expectations is that buyers do not uncover organic revenue growth problems at the seller. Consequently, while agreeing to a deal price, the acquirer’s management does not fully appreciate that they are implicitly signing up for a heroic turnaround of an underperforming institution.

More after the jump:

They make the great but frequently-overlooked point that banks for sale are much more likely to be having organic growth problems already, and may be dressing the balance sheet. If as a buyer you are also having trouble growing organically (and why else pay a big premium for another institution?), you have a recipe for an underperforming combination.

If, as a potential buyer, your retail organic revenue growth has been consistently strong and has been underpinned by distinctive customer value, you have higher odds of success in the M&A game. However, even for such banks, it is important to think twice if your target is in a region where it faces particularly strong competition.
Conversely, if your performance and that of the target are sub par, and management has a “must-win-this-deal” mentality, then a plan for how the target will be managed so as to be competitive in the market becomes paramount.

(via BankStocks)

Posted by The Banker at 06:31 PM | TrackBack

Is a Flattening Yield Curve Massacring Bank CFOs?

The WSJ connects the dots on the recent departure of BofA and FifthThird Bank CFOs, saying that both were pushed out because they failed to anticipate and respond to a flattening yield curve and the ensuing loss of net interest income.

Like all financial-firm executives, finance chiefs of the country's regional banks are grappling with a rise in short-term rates even as long-term rates fall. This convergence of rates -- a bugbear that bankers call a flattening yield curve -- cuts profit margins by raising the banks' borrowing costs while lowering the rates they charge on loans to customers.

Perhaps it was not so much the positioning failure as the failure to accurately warn investors that did them in:

Analysts believe the disconnect between the executives' public remarks and the bottom lines was the real cause of their departure. Some say more departures are possible.
"Bank CFOs are now being pilloried because of their inability to correctly gauge this shift in the financial markets," said Richard X. Bove, an analyst with Punk Ziegel & Co. Messrs. Graf and Oken "did not provide the appropriate signal to shareholders."

Asian bankers are of course unable to take as much structural rate risk due to the lack of long-term yield curves in most local currencies, but we have still seen some earnings disappointments on the NIM and NII fronts this past reporting period.

Posted by The Banker at 05:10 PM | TrackBack