Profiting from bank failures

Big banks are scooping up troubled, smaller institutions at a time when growth is hard to come by -- and thanks to favorable FDIC rules, more deals are likely.

EMAIL  |   PRINT  |   SHARE  |   RSS
 
google my aol my msn my yahoo! netvibes
Paste this link into your favorite RSS desktop reader
See all CNNMoney.com RSS FEEDS (close)
By Colin Barr, senior writer

sheila_bair_3.03.jpg
A wave of bank failures is pressuring Sheila Bair's FDIC insurance fund.
chart_bank_buy.gif
chart_bank_failures.03.gif

NEW YORK (Fortune) -- Cleaning up after bank failures is one chore you won't hear bankers complaining about.

Since the start of 2008, 89 banks have failed, including giants Washington Mutual, IndyMac and BankUnited. Scores of additional failures are expected in coming years, as the industry works through trillions of dollars worth of residential and commercial real estate problems.

While the failures are taking a toll on the Federal Deposit Insurance Corp.'s deposit insurance fund -- the FDIC this year raised fees on banks in a bid to rebuild the fund's depleted balances -- they can also give healthier banks a chance to grow on the cheap. That's valuable at a time when many institutions have been shrinking in response to the recession.

"We continue to believe a select group of regional banks with sufficient capital, credit quality and management talent stand to benefit by rolling up failed institutions, thereby expanding their banking franchise," analysts at Keefe Bruyette & Woods wrote in a note to clients this week.

Indeed, while most of the biggest recent bank failures have been resolved via sales to major institutions or investor groups -- JPMorgan Chase (JPM, Fortune 500) purchased WaMu, and private equity interests took over IndyMac and BankUnited -- regional banks have been bulking up as well.

Since the banking crisis started last year, six regional banks have bought at least two failed banks from the FDIC. The leader has been Zions Bancorp (ZION), a Salt Lake City-based institution that has acquired four banks from the FDIC.

Other buyers of multiple troubled banks include U.S. Bancorp (USB, Fortune 500), the Minneapolis-based bank that last year bought the remains of troubled thrifts Downey Savings and PFF, which failed on the same day. The joint purchase of Downey and PFF wound up being the third largest deal by assets for failed banks last year, after the WaMu and IndyMac sales.

FDIC rules require the agency to resolve bank failures in the manner that's least costly to the deposit insurance fund. The deposit fund is backed by fees paid by banks, but the FDIC has a credit line with the Treasury Department that it could tap in an emergency.

The rash of failures over the past year and a half has come at heavy cost to the fund, which is now 75% below its statutory minimum balance.

The cost to the FDIC fund in the U.S. Bancorp and Zions deals alone was $3.6 billion. The agency also agreed to so-called loss-sharing agreements on some of the transactions, which means the fund could end up shouldering additional costs on troubled assets taken on by the acquirers.

It's this provision -- capping the acquirer's losses at the expense of the fund -- that is most alluring to regional banks and their investors.

Strong regional banks "should benefit from picking up relatively attractive deposit franchises with low or no credit risk given the FDIC loan guarantees that have so far accompanied these deals," Morgan Keegan analyst Robert Patten wrote in a note to clients this month.

Patten pointed to Cincinnati's Fifth Third (FITB, Fortune 500) and Atlanta's SunTrust (STI, Fortune 500) as two of the banks that might be chosen to participate in future deals, while Keefe analysts said U.S. Bancorp and BB&T (BBT, Fortune 500) could be singled out as buyers of more failed banks.

Some bankers have downplayed questions about buying failed institutions. Such deals "really are off our radar," Fifth Third chief executive officer Kevin Kabat told investors last week, noting that there have been relatively few bank failures in the Midwest.

But given the advantageous terms, no one is ruling FDIC-assisted deals out, either.

U.S. Bancorp chief executive officer Richard Davis said in a conference call with analysts and investors last week that the bank "will always be available" for any "opportunities that come along" on the FDIC failed bank list, though it is keeping an eye out for bigger ones. To top of page

Company Price Change % Change
Ford Motor Co 8.29 0.05 0.61%
Advanced Micro Devic... 54.59 0.70 1.30%
Cisco Systems Inc 47.49 -2.44 -4.89%
General Electric Co 13.00 -0.16 -1.22%
Kraft Heinz Co 27.84 -2.20 -7.32%
Data as of 2:44pm ET
Index Last Change % Change
Dow 32,627.97 -234.33 -0.71%
Nasdaq 13,215.24 99.07 0.76%
S&P 500 3,913.10 -2.36 -0.06%
Treasuries 1.73 0.00 0.12%
Data as of 6:29am ET
More Galleries
10 of the most luxurious airline amenity kits When it comes to in-flight pampering, the amenity kits offered by these 10 airlines are the ultimate in luxury More
7 startups that want to improve your mental health From a text therapy platform to apps that push you reminders to breathe, these self-care startups offer help on a daily basis or in times of need. More
5 radical technologies that will change how you get to work From Uber's flying cars to the Hyperloop, these are some of the neatest transportation concepts in the works today. More
Sponsors
Worry about the hackers you don't know 
Crime syndicates and government organizations pose a much greater cyber threat than renegade hacker groups like Anonymous. Play
GE CEO: Bringing jobs back to the U.S. 
Jeff Immelt says the U.S. is a cost competitive market for advanced manufacturing and that GE is bringing jobs back from Mexico. Play
Hamster wheel and wedgie-powered transit 
Red Bull Creation challenges hackers and engineers to invent new modes of transportation. Play

Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2018 and/or its affiliates.