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Financials
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Large Cap
Market Cap £7.63bn
Enterprise Value £15.62bn
Revenue £3.62bn
Position in Universe 118th / 1040

DEALTALK-U.S. banks targeted by activist investors on merger wave hopes

Fri 5th February, 2016 6:00am
(For more Reuters DEALTALKS, double click on  DEALTALK/ ) 
    By Michael Flaherty and Mike Stone 
    Feb 5 (Reuters) - Activist investors are putting the U.S. 
banking sector in their crosshairs, betting that headwinds 
whipping through the industry will accelerate consolidation 
among lenders. 
    While these activist hedge funds have already targeted some 
major financial companies, such as insurer American 
International Group Inc  AIG.N  and auto loan lender Ally 
Financial Inc.  ALLY.N , banks have historically stayed out of 
their sights. 
    Activists launched 97 campaigns last year aimed at the U.S. 
financial sector, around triple the amount from 2009, according 
to Thomson Reuters Activism data. Of those campaigns, 22 were 
aimed at banks, up from eight in 2009, the data show. The number 
 has increased every year since the 2008 financial crisis. 
    Hedge funds such as Ancora Advisors, Clover Partners and 
Seidman & Associates are buying up stakes in lenders across the 
U.S., from community banks to large regional lenders.  
    Driving these investments is the view that ultra-low 
interest rates, lagging returns on equity and tough regulations 
will push more banks to merge, with buyers willing to pay a 
hefty multiple to a bank's tangible book value. Activist 
investors interviewed by Reuters say another factor is exposure 
to energy-related loans, which is driving down the valuations of 
certain banks and making them all the more vulnerable to a 
takeover. 
    "Bigger banks are back in the market doing deals," said 
Ralph MacDonald, a partner at law firm Jones Day, who 
specializes in mergers and acquisitions.  
    U.S. bank mergers and acquisitions volume rose 58 percent 
last year to $34.5 billion, according to Thomson Reuters data. 
     
    VULNERABLE TO AN APPROACH 
    Last week alone saw two mergers. Huntington Bancshares Inc 
 HBAN.O  said it would acquire FirstMerit Corp  FMER.O  for $3.4 
billion in stock and cash, combining two Ohio-based lenders. And 
Chemical Financial Corp.  CHFC.O  said it was merging with 
Talmer Bancorp Inc.  TLMR.O  in an all-Michigan transaction that 
will create a bank with $16 billion in assets. 
    To be sure, activists' bets on banks are not without risk - 
especially if they get the timing wrong. The S&P 500 Financials 
index is down 14 percent since mid-December on fears that the 
Federal Reserve will take longer than previously expected to 
raise interest rates, hurting banks' profitability. Another 
worry is that oil prices drop further, making a bank's energy 
loan book more of a liability than an opportunity.  
    A takeout by a larger rival is also never a guarantee, but 
that is a risk activists are willing to take. 
    On Monday, Hudson Executive Capital, a New York-based hedge 
fund, announced it had acquired a $56 million stake in 
Dallas-based Comerica Bank  COM.N , a lender with $71 billion in 
assets under management. 
    Among the banks that could buy Comerica is North 
Carolina-based BB&T Bank  BBT.N , according to activist 
investors who spoke to Reuters. David White, a BB&T spokesman 
said the company does not comment on speculation relating to 
mergers or acquisitions. Comerica declined to comment. 
    Zions Bancorporation  ZION.O , a Salt Lake City lender with 
$60 billion in assets, is another bank that activists said is 
vulnerable to an approach. Zions did not return calls seeking 
comment.  
    Comerica's return on common equity is about 7 percent while 
Zions is around 5 percent. That is also lower than other peers, 
potentially opening up Zions to criticism that it isn't working 
its balance sheet aggressively enough.  
    As lenders with more than $50 billion in assets, both banks 
are labeled systemically important financial institutions 
(SIFIs), meaning they are subjected to enhanced Federal Reserve 
supervision and the central bank's annual stress tests. The SIFI 
label comes with heavier compliance cost burdens that bank 
executives say hit mid-sized banks harder than the largest 
institutions, which have the scale to better absorb the cost. 
    "For U.S. depositories, if you're trying to drive growth, 
how much cost can you continue to cut?," said Daniel Kerstein, a 
Barclays investment banker who advises companies about activism 
and activist campaigns. "Ultimately, you need scale to spread 
out your costs."  
                      
    LOSS OF FUN 
    PL Capital, an activist hedge fund focused on the bank 
sector, is raising a $200 million hedge fund that will target 
banks with up to $50 billion in assets.   
    The firm believes that any bank earning a 12 percent or less 
return on tangible common equity needs to consider whether it 
can prosper as an independent institution, PL Capital co-founder 
Richard Lashley, said in an interview.  
    A bank's exposure to falling energy prices makes it even 
more vulnerable, he noted. But another key factor is a bank's 
ability to maneuver through a climate where low rates are 
compressing net interest margins, and stricter regulations are 
increasing costs.  
    "Management teams and boards are just exhausted," said 
Lashley, who is based in New Jersey. "It's not fun to run a bank 
anymore." 
    The rich pickings that activists see in banks contrasts with 
a drought for such opportunities that persisted for many years. 
After the 2008 financial crisis, bank mergers ground to a halt. 
Banks subsequently focused on cleaning up their own balance 
sheets and implementing new regulations enforced by the Fed as 
part of the Dodd-Frank legislative overhaul of the U.S. 
financial system. Beginning around last year, bank deals perked 
up again, emboldening activists.  
    "My phones are ringing off the hook with calls coming in 
from banks wanting to sell," said Pat Hickman, the CEO of Happy 
State Bank, a lender in the Texas panhandle. "And one of the 
primary reasons is regulation." 
    Activist investors have traditionally steered clear of large 
Wall Street banks, wary of their size, complexity and high level 
of attention they earn from regulators and politicians. Still, 
intervention by activist investors may not be entirely out of 
the question in the future. 
    Mike Mayo, managing director of brokerage firm CLSA and a 
veteran banking analyst, last week hinted that frustrated stock 
owners were a factor behind his decision to upgrade his rating 
of Bank of America's stock. 
    "While an activist is an outside shot, increased shareholder 
pressure seems likely," Mayo said in his Jan. 29 note.     
 
 (Additional reporting by Dan Freed in New York; Editing by Greg 
Roumeliotis and Martin Howell) 
 ((michael.flaherty@thomsonreuters.com; 646-223-6116; Reuters 
Messaging: michael.flaherty.thomsonreuters.com@reuters.net)) 
 
Keywords: USA BANKS/ACTIVISTS
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