NEW YORK - It is possible big banks such as USB, PNC, WFC would be licking their chops seeing Regions Financial finally trading at a palatable price for a merger. The companies can offer a 25% premium to the current price and buy $130 billion of assets for around $6.3 billion. These companies would likely pay back Regions's tarp and write down the assets by at least $8 billion based on the fair value estimates by Regions of the company's loan book. This would give the company an adjusted tangible book of -$1 billion.
In the past WFC, PNC, JPM or BAC would acquire these fixer upper banks. The cost would be close to $7 billion based on the negative adjusted tangible book value and the price they would pay. RF after these writedown can likely earn at least $1 billion a year and likely $1.3 billion in the future and more as the recession subsides.
The companies would likely pay $6 billion in cash and use funds from Region's business to pay back its TARP. A company like WFC can add $130 billion of assets and lose $1 billion of tangible equity and have a tier 1 ratio of approximately 7.3%. PNC could do it and have one of 6.2%. JPM would keep one around 9.5%. PNC's ratio dropped most substantially due to its smaller size.
All of these companies in the old times would be chomping at the bit to buy a company trading at 3.7 times normalized earnings even though their companies themselves are trading at absurd prices.
However the current environment with regulation makes the financial service system weaker. With to much regulation RF cannot be bought making the economy weaker. With lessor regulation RF could be bought and more loans could be made. This means RF will be operating as a wounded bank for years to come causing damage to the economy. Imagine Wachovia acting by itself instead of inside WFC. WFC has grown Wachovia while Wachovia would have wasted away without the merger.
There needs to be a balance where M&A can happen but at the same time banks do not over leverage themselves. Right now we have swung to the other pendulum which is just as damaging to the economy.
When it comes to our banks, government intervention has done more harm than good.
ReplyDeleteI think the bank themselves are fine but I have big problems with Regions Financial being public since the government won't let a strong bank buy it because then they have to worry about more regulation.
ReplyDeleteIf these regulations existed in 2007 Wachovia fails without being acquired.
I would love to see how the fed says thats a better state for the economy.