On Thursday, the second significant bank acquisition was announced in two days, with NYCB acquiring AF, followed by KEY acquiring FNFG. As we have written in the past, with over 350 publicly-traded banks (5,600 in total), we expect the 30+ year secular trend of U.S. bank consolidation to continue for many years (see our December 13th, 2012 note “100 Bank Mergers”, where we discuss consolidation in the U.S. mid-cap and small-cap banking space).

The two announced deals, which are among the largest in the past several years, were:

Attractive yield
1) NYCB Buys AF – Consolidating Two Large NYC Thrifts

On Thursday, October 29, New York Community Bancorp (NYCB), a thrift with ~$49 bln in assets, announced its acquisition of Astoria Financial (AF) for $2 bln, or ~1.5x tangible book value (and a ~10% premium to AF’s pre-announcement price). Importantly, by acquiring the second largest thrift in New York State, this deal pushes NYCB far past the $50 bln in assets threshold for further regulatory oversight/costs.[1] The market’s reaction to the deal was quite negative, as NYCB’s stock fell ~12% after the announcement (AF fell 8%). The decline was primarily attributable to the pro forma dividend reduction. NYCB had a pre-deal dividend yield of ~5%, one of the highest among U.S. banks/thrifts. Post-deal, the pro-forma yield declined to below 4%.

2) KEY Buys FNFG – Becoming 13th Largest Bank in the U.S.

On Friday, October 30, KeyCorp (KEY), a bank with $95 bln in assets, announced its acquisition of First Niagara Financial Group (FNFG) for $4.1 bln, or ~1.7x tangible book value and ~7.0% core deposit premium (and a ~10% premium to pre-announcement price[2]). The market’s reaction to this deal, which is creating the 13th largest bank in the U.S., was also negative, with KEY’s stock declining 7% after the announcement. We believe the decline was the result of four main factors: (i) large size of the target increases deal risk[3], (ii) significant tangible book per share dilution, (iii) the relatively poor performance of FNFG over the past few years, and (iv) minimal EPS accretion which is not forecast to be realized until 2018.

With ~350 Mid-Cap/Small-Cap Publicly Traded Banks Remaining, Deal Activity Expected to Continue

Although the market’s reactions to both deals were negative, we attribute it to deal-specific factors (i.e. dividend cut for NYCB, poor deal metrics for KEY). We continue to forecast continued consolidation within the U.S. banking sector, with the vast majority of deal activity centred within the over 300 U.S. mid-cap and small-cap size banks. As mentioned, there are still far too many banks in the U.S., and with rising regulatory costs and significant increases in core capital depressing returns on equity, consolidation is one of the most powerful ways to mitigate these negative impacts.

Related Insights

100 Bank Mergers
Case Study: Citizens Republic (U.S. Mid-Cap Bank)


[1] AF has ~$15 bln in assets, ~$9 bln in loans, and 87 branches and has a significant deposit market share in the Long Island market.
[2] FNFG’s stock price increased significantly in the month leading up to the announcement, due to speculation that the bank would sell itself.
[3] FNFG has ~$39 bln in assets, ~$23 bln in loans, and 394 branches. Headquartered in Buffalo, it has a significant presence in New York, as 65% of their $25 bln in core deposits are in the state.

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