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3 Bank Stocks That Are Prime Buyout Targets

Below-average capital and bad returns make these stocks targets

   

In a recent report titled Bleeders and Leaders: Redefining the 2014 U.S. M&A Banking Market, consulting firm Inviticus identified which banks should be sold and which one should be buying to expand their footprint and asset base.

handshake 150x150 3 Bank Stocks That Are Prime Buyout TargetsThe firm identified 828 banks that should be sold because they do not have an adequate capital base or sufficient earnings power. Because of their weak capital positions, these banks will be under increased regulatory pressure as well. The consultants think that banks in this classification should take advantage of the current pricing environment and high level of acquisition interest by regional banks and sell while they can.

It’s a fairly easy matter to sit down and draw up a list of bank stocks that should put themselves up for sale right away. I simply looked for banks with below-average return of assets and equity-to-asset ratios of less than 10.

This creates a list of bank stocks where management should consider just selling the bank because raising new capital when you have a low return on assets doesn’t make a lot of sense. It’s highly likely that these bank will have trouble competing with more profitable, better capitalized institutions.

Metro Bancorp (METR) is one bank that might consider selling based on these metric. The company’s return on assets has consistently been well below its peer group, and the equity-to-asset ratio is just 8.46 — well below the 11 average across the United States.

Two firms with a reputation for pressuring banks to achieve higher returns for shareholders by either improving returns or selling the bank outright, Castine Capital and PL Capital, have a position in the bank. The bank is a little rich for me at 1.2 times book, but if management could attract a higher price from a buyer interested in its market selling, the bank would be a strong option in my opinion.

QCR Holdings (QCRH) is another bank that has consistently had a lower return on assets than its peer group. The Illinois based bank has 9 offices and about $2.4 billion in total assets. The bank has an equity-to-assets ratio of just 7.4, which is well below the national average. The Illinois market has seen strong merger and acquisition activity in the past year, and this bank could become a target .

First Citizens Bank and Trust (FCNCA) is another bank that has seen its returns slipping in the past year. The return on assets and return on equity have both dropping for three consecutive quarters. The tangible equity-to-assets ratio is improving, and now stands at 9.46 but is still below the national averages.

The bank has 410 branches and is in one of the more attractive markets in the country in Raleigh, N.C. The bank just closed a merger with 1st Financial Services Corporation but could become a target itself if returns do not improve going forward.

We are starting to see bank merger activity accelerate as banks like Huntington Bancorp (HBAN) and  First Merchants (FRME) looking to expand and growth their asset base in the aftermath of the credit crisis. Banks with below-average capital and returns could quickly become buyout targets.

As of this writing, Tim Melvin was long HBAN and FRME.


Article printed from InvestorPlace Media, http://investorplace.com/2014/02/bank-stocks-buyout-targets/.

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