S&P Global Market Intelligence principal analyst …
Tales from Top Performers is a new series under the Street Talk banner that will feature conversations with executives at high-performing banks about their bank and experience in the sector; their view of current issues, and the greatest challenges and opportunities they see ahead. The inaugural episode features a discussion between James Beckwith, CEO of Rancho Cordova, Calif-based Five Star Bancorp, a previous winner of S&P's Global Market Intelligence's annual bank rankings, and S&P co-hosts Nathan Stovall, director of financial institutions research, and Jimmy Pittenger, who oversees the firm's US financial institutions commercial team. In the episode, Beckwith discusses how he got into banking, what he loves about the industry, how his institution has built an attractive deposit franchise and managed elevated exposure to commercial real estate, and his view on the greatest challenges and opportunities ahead.
The banks that failed in the spring of 2023 were outliers that violated some of the golden rules of banking, but many investors continue to unfairly paint the bank group with a broad brush, according to KBW CEO Tom Michaud. In the episode, Michaud discussed the drivers of the large bank failures in 2023 and the idiosyncrasies of those institutions. He further discussed the regulatory response to the liquidity crunch and criticized the Basel III endgame proposal while advocating for deposit insurance reform. The executive also noted that investors continue to treat all banks the same and express concern over their commercial real estate exposures but noted that most of the industry faces an earnings issue rather than a threat to safety and soundness.
Regulatory scrutiny has intensified in the aftermath of the liquidity crunch that erupted in 2023 and could play an even larger role in bank M&A activity in 2024 by motivating more banks to consider selling, while also standing in the way of some transactions. The episode features views presented by advisers at Hovde Group, KBW and Luse Gorman at the Acquire or Be Acquired conference, commentary from executives at Community Bank System and Columbia Banking System on the current state of bank M&A, and some discussion of the unfolding situation at the New York Community Bancorp.
U.S. banks’ fourth-quarter 2023 earnings demonstrated continued pressure on funding costs and minimal slippage in credit quality. The Street largely took the results in stride, but management teams were hopeful that net interest margin pressure could subside in the second half of 2024 and credit quality would hold up in the face of a higher for longer rate environment, according to Gerard Cassidy, co-head of global financials research at RBC Capital Markets. In the episode, the veteran analyst said he shares that optimistic outlook and believes the current environment is more similar to 1995 when the U.S. economy digested sharp rate hikes by the Federal Reserve and likely will not result in a severe downturn like some investors fear. Cassidy believes bank stocks are a show me story but does see further catalysts on the horizon. The analyst also offered his outlook for bank M&A activity.
The word unprecedented became commonplace in banking circles in 2023. The Federal Reserve’s rate hike campaign pushed bank balance sheets deeply underwater, spurred deposit outflows and exposed asset/liability mismatches at some institutions that culminated in record-breaking bank runs that led to the second, third and fourth largest bank failures in US history. Those closures and the liquidity crunch, regulatory response, market selloff and eventual recovery that followed changed the competitive landscape and the way bank observers view the industry. This episode features commentary from experts at BTIG, Davis Polk, Janney Montgomery Scott, KBW, Luse Gorman, Piper Sandler and others on the lessons learned from the liquidity crunch, the fallout afterward and the potential opportunities that lie ahead.
Bank stocks have rallied since the Federal Reserve offered hopes of rate cuts in 2024 and there are further catalysts on the horizon, including a pickup in M&A activity, according to Mendon Capital Advisors President Anton Schutz. In the episode, the veteran bank stock investor offered his view of bank stock valuations, credit quality, bond portfolio restructurings and increased M&A activity on the horizon, through both mergers of equals and traditional buyouts.
The negative impact from higher interest rates has led a number of banks to considering balance sheet restructurings and a few institutions have pursued those transactions by unlocking capital through sales of business lines or merging with another company, according to Bill Burgess, co-head of financial services investment banking at Piper Sandler. In the episode, Burgess discussed the current roadblocks to M&A activity, various transactions banks have pursued to facilite transactions, the prospect of further deals on the horizon and the potential for increased private equity investing in the bank space.
As community banks face a challenging operating environment due to higher for longer rates and heightened regulatory scrutiny, Tony Scavuzzo, managing principal at Castle Creek Capital, expects private equity investing in the sector to increase. In the episode, the private equity veteran said he expects new investments to support independent banks looking to play offense and purge underwater bonds or credit risk in their loan portfolios as well as capital being provided to help facilitate bank M&A activity.
Many bank boards are stuck as they face investor scrutiny and wait for slippage in credit quality, but experts at Raymond James’ inaugural whole loan conference noted that private equity firms are waiting to infuse capital into institutions so they can play offense in the future.In the episode, John Toohig, head of whole loan trading at Raymond James and host of the firm’s recent conference, discussed the outlook that speakers shared for the economy and the credit quality of mortgages, credit cards and commercial real estate. Toohig also shared how depositories and their boards are reacting to the higher for longer rate environment, the current gap between buyers and sellers in the secondary loan market, and investor appetite to support bank M&A and loss trades in institutions’ bond and loan portfolios.
In the latest Street Talk podcast, Davis Polk Partner David Portilla says implementing early remediation triggers outlined in the Dodd-Frank Act would be more effective than the Basel III endgame to avoid repeating the spring 2023 bank failures. In the episode, Portilla made the case for enacting early remediation triggers proposed in section 166 of the Dodd-Frank Act. That provision directed the Fed to adopt regulations for the early remediation of financial weakness. The Fed outlined four different levels under an early remediation framework, but never implemented the rules.
Banc of California Inc.'s plans to acquire PacWest Bancorp, the largest bank deal thus far of 2023, offers some hope that a rebound in bank M&A could be on the horizon, but advisers acknowledged that the unique nature of the transaction makes it stand apart. In the latest Street Talk podcast, members of the S&P Global Market Intelligence news team highlight discussions with bank deal advisers, including senior members from Janney Montgomery Scott and Troutman Pepper Hamilton Sanders LLP. The advisers, both investment bankers and attorneys, discussed whether the deal will pass regulatory muster, the potential for further private equity involvement in the bank space and the outlook for bank M&A activity.
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