The anticipated wave of U.S. bank consolidations, led in part by Canadian banks, appears to be underway. Canadian institutions have acquired two U.S. banks over the last three trading days. Toronto-Dominion Bank's (TD) $6.3 billion all-cash purchase of Chrysler Financial, announced on Tuesday, came on the heels of the Bank of Montreal's (BMO) $4.1 billion all-stock purchase of Marshall & Ilsley (MI) last Friday. Analysts believe these events may be the start of more merger and acquisition (M&A) activity among U.S. banks -- and they expect that trend to accelerate in 2011.

Financial stocks, which have lagged on the S&P 500 most of the year, rallied on the two deals. The S&P 500 Financials Index was up 3.42, or 1.6%, on Tuesday, closing at 212.19.

TD Bank stock closed up 3.5% at $71.95 on the news, and Bank of Montreal traded at $56.80, up 2.2% on Tuesday. Several analysts generally view the two Canadian acquisitions favorably and project increased M&A for 2011.

Some U.S. Banks Now "Attractive Takeover Targets"

Morningstar equity analyst Jim Sinegal even suggests the Bank of Montreal's willingness to pay a significant premium for Marshall & Ilsley could represent a turning point. Prior to these deals, the Federal Deposit Insurance Corp. (FDIC) had participated in the majority of the billion-dollar bank acquisitions in 2010 -- as it disposed of failed banks on the cheap.

Now with all the prime assets gone, banks on the FDIC's "troubled bank" list have average assets of about $500 million, making it less likely that larger banks will pursue them. As a result, banks not on the FDIC list -- those that survived the financial crisis but have few growth opportunities -- are now attractive takeover targets that can yield higher returns for shareholders.

"It's possible that this deal could both increase the willingness of other hobbled financial institutions to sell and provide notice to potential buyers that the days of cheap FDIC-assisted deals and last-minute takeunders [offering a firm significantly less than market value for its share prices] are coming to an end," Sinegal wrote in an analyst's note last week.

The Consolidation Trend Should Continue

In fact, the investment bank and financial services research firm Keefe, Bruyette & Woods (KBW) predicted last July that Canadian banks would begin buying some U.S. banking assets -- with Marshall & Ilsley projected as a takeover target in that report.

For 2011, KBW predicts significant M&A among the nearly 8,000 remaining U.S. banks. During a recent press briefing in New York, KBW President and Vice Chairman Thomas Michaud said KBW expects the consolidation in the financial services industry -- a trend that began prior to the current financial crisis -- to continue. According to Michaud, now that many banks have raised capital requirements exceeding regulatory levels and have excess cash on their balance sheets, they're in position to buy small and midsize banks that are only now experiencing the problems that larger banks have already worked through.

And federal regulators are more comfortable with the idea of having fewer banks that are better capitalized and stronger, and their potential consolidation, Michaud said, helps that goal.

Most Likely List

The KBW report highlighted as most likely to be acquired banks including Abington Bancorp (ABBC), Boston Private Financial Holdings (BPFH), Cardinal Financial (CFNL), Encore Bancshares (EBTX), Susquehanna Bancshares (SUSQ) and Western Alliance Bancorp (WAL). KBW viewed those banks as having "an attractive footprint, a high proportion of low-cost deposits, above-average normalized earnings power, and strong fee-income businesses with high barriers to entry."

And if these recent deals by Canadian banks don't jump-start M&A, KBW says activity will pick up by the middle of 2011.

"If our outlook is right, we will see acceleration in the back half of 2011 and definitely into 2012 of what we see as open bank and friendly acquisitions – hopefully at some premiums," said KBW chief equity strategist and associate director of research, Frederick Cannon. Many shareholders will be looking forward to that.


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Robert & Lisa

The rich getting richer and the middle class and poor keep getting poorer. The last two years, more so than ever. Still think Obama and the corrupt Demoncrat thugs are the answer? There is a reason George Soros and his rich, corrupt cohorts are supporting the unions and the Demoncrat politicians. Are you smart enough to understand why?

December 24 2010 at 8:12 AM Report abuse +1 rate up rate down Reply
Robert & Lisa

The poor class has grown by almost 50% just since Obama got elected. Think someone is getting deceived? Obama and the Demoncrat thugs do it again.

December 24 2010 at 8:09 AM Report abuse +1 rate up rate down Reply
Robert & Lisa

Isn't it strange how the rich keep getting richer under Demoncrat rule? Think someone is trying to deceive someone?

December 24 2010 at 8:05 AM Report abuse +1 rate up rate down Reply
jkennedy806

Where is Timmy Geithner? In order for one bank to be a takeover by another bank it has to be approved by the FDIC/fed government. This is what got US in the mire of crapola in the first place. Does CountryWide and WaMU sound familiar.
Let the small banks try to do it -- and keep the too big to fail banksters away. In order to fix a problem you have to confront the problem. And the problem is instead of swapping toix dervatives now the banksters are just swapping banks.
OMG is Washington stupid. If pro is the opposite of con, than what is the opposite of Progress.

December 23 2010 at 9:30 AM Report abuse +1 rate up rate down Reply
jkennedy806

Where is Timmy Geithner? In order for one bank to be a takeover by another bank it has to be approved by the FDIC/fed government. This is what got US in the mire of crapola in the first place. Does CountryWide and WaMU sound familiar.
Let the small banks try to do it -- and keep the too big to fail banksters away. In order to fix a problem you have to confront the problem. And the problem is instead of swapping toix dervatives now the banksters are just swapping banks.
OMG is Washington stupid. If pro is the opposite of con, than what is the opposite of Progress.

December 23 2010 at 9:30 AM Report abuse +2 rate up rate down Reply
Tom Harryman

The financial institutions, primarily banks, have caused their downfall thru significantly increased risk taking fueled by their out of control greed and the lack of government oversight. I have a very, very difficult time finding any sympathy for the banks that are now at risk of being taken over. The bank executives and board of directors ought to be held accountable for thier recklessness and the severe damage they have caused to the whole countries economy. Greed has caused all of the significant economic problems and if they are not reined in soon the Oil Industry will keep our economy from recovering. resimost of the ecoo

December 23 2010 at 9:29 AM Report abuse +1 rate up rate down Reply
1 reply to Tom Harryman's comment
Robert & Lisa

No, the government fingers in banking led by Demoncrat Barney Frank has caused this mess.

December 24 2010 at 8:06 AM Report abuse +1 rate up rate down Reply
CADNR

foreign bank takeovers. everthing in the usa is foreign, even the president. This proves americans have NO pride left.

December 23 2010 at 8:56 AM Report abuse +1 rate up rate down Reply