Increasing Efficiency May Not Be Enough for Regional Banks to Survive Independently: Examining the Relationship Between Cost of Capital and Nonperforming Assets

Wall Street Transcript

67 WALL STREET, New York - February 7, 2013 - The Wall Street Transcript has just published its Southeast & Midwestern Banks Report offering a timely review of the sector to serious investors and industry executives. This special feature contains expert industry commentary through in-depth interviews with public company CEOs and Equity Analysts. The full issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

Topics covered: Heightened M&A Activity - Consolidation in Regional Banking - Growth in U.S. Midwest - Regulatory Obstacles and Fee Income Replacement - Rise of Commercial and Industrial Lending

Companies include: Wells Fargo & Company (WFC), BB & T Corp. (BBT), First Midwest Bancorp Inc. (FMBI), Regions Financial Corp. (RF), FirstMerit Corp. (FMER), Huntington Bancshares Inc. (HBAN), Citizens Republic Bancorp, Inc (CRBC), US Bancorp (USB), Capital One Financial Corp. (COF), Fifth Third Bancorp (FITB), First Niagara Financial Group (FNFG) and many more.

In the following excerpt from the Southeast & Midwestern Banks Report, an expert analyst discusses the outlook for the sector for investors:

TWST: We've been talking about the acquisitions potential here. Are there sellers? Are there banks interested in doing deals from the sellers' point of view?

Mr. Mitchell: We think that there are two kinds. The first is the sitting ducks. Of banks that we follow that we think are sitting ducks under the coverage here, we would include companies like First Midwest (FMBI) and Regions Financial (RF). First Midwest is a lot smaller; it's a smaller, easier acquisition, but it's a company that basically has underearned and has had strategic problems largely because its legacy credit difficulties have been so severe that it is still trying to dig itself out from the fiscal crisis. That means that another company could use the same deposit franchise probably to greater advantage.

Similarly, Regions, although they've done a really good job of taking a huge whack at their nonperforming assets and taking large write-offs, they still basically are operating with a very high cost of capital. We think that that's a company that, although it's large, would be a kind of sitting duck because I think if somebody came in with a $10 bid, I don't think they could afford to turn it down. There's that side of it. Could you afford to turn down a deal that might five years from now look like it was a great deal for the buyer? I'm not sure they could. Somebody like BBT could because they already have a high price to their tangible book value; they're already rated highly by investors, so I think there's that side of it.

Then there's the other side of it where there's an opportunity involved. We think that there are banks that can do both. They can be acquirers, but you could turn around and say, "Well, but they could also be taken over." Again, in the area that we're looking at, we think that smaller companies like FirstMerit (FMER) and Huntington Bancshares (HBAN), both have had really excellent credit-management approaches, highly different in the two franchises. FirstMerit essentially avoided most of the credit problems of the entire fiscal crisis.

Huntington was in the middle of it, but under new management they addressed their credit and risk management problems very, very aggressively. We think both of those - they're relatively small-capitalization, they're both being run very efficiently; we think that they both could turn out to be very successful acquirers.

FirstMerit's in the middle of a deal right now of a large bank - and for them a large deal, Citizens Republic (CRBC) - but they're also very well-run institutions. We think they're reasonably lean. We think...

For more of this interview and many others visit the Wall Street Transcript - a unique service for investors and industry researchers - providing fresh commentary and insight through verbatim interviews with CEOs, portfolio managers and research analysts. This special issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

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