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Wednesday, Sep 27, 2023

Regional Banks Ready to Expand

For the most populated state in the country, California comes up short when it comes to regional bank supply. This means a local merger and the collapse of two banks headquartered in the state leave a banking vacuum. As a result, Los Angeles banks are expected to pounce on new business pending a thawing of market conditions.

According to California’s Department of Financial Protection and Innovation, there are fewer than 100 state-chartered banks headquartered here, putting the state on par with the likes of Georgia and Louisiana.

The largest players in the city, City National Corp. and East West Bancorp, have already hinted at growth initiatives, even as the City National, a subsidiary of the RBC Financial Group, parent of the Royal Bank of Canada is receiving steep support from its parent company to develop operational infrastructure. In its third-quarter earnings marking the period between May and July, the bank stated net income was cut by $147 million, due in part because of a costly bet to develop City National as its primary wealth management arm following the sale of RBC Investor Services. 

Amid speculation high interest rates and inflation ultimately push customers to seek high-yielding alternatives deposits, the two largest banks in Los Angeles reported increases in total deposit amounts, signaling new clients are onboarding and steadying loan-to-deposit ratios amid adverse lending conditions.

East West moving up

East West Chairman and Chief Executive Dominic Ng has stepped into the spotlight as a bullish mover in the Los Angeles banking scene. In the Pasadena-based bank’s August earnings call he told investors the collapse of several competitors this year has made room for the bank to expand into new business areas abandoned by lenders.

“Today they’re gone, so we have just so much less competition,” Ng said.

In its second-quarter earnings round East West reported earnings per share rose $2.20, up 21% from the previous year. Even its net interest margin, the difference between the rates bank pay for deposits and what they collect on loans and other assets, was a healthy 3.55%, despite additional interest rate hikes this summer. 

After PacWest Bancorp and Silicon Valley Bank reeled from mismanagement of interest-rate risk, this margin demonstrates that East West’s investments have provided enough capital leeway for continued growth through record-high interest rates.

These results indicate its asset diversification has protected the bank from the pummeling taken by its former closest independent competitor, PacWest. Even after the merger, East West still outpaces the soon-to-be combined Banc of California Inc. in total assets by almost $30 billion, growing by 10% year over year. 

Mergers on mute

As banks brace themselves for the possibility that the interest rate situation could undermine profitability, consolidation could bring security. Investment bankers hear the clamor, but don’t expect activity to pick up before the end of the year.

“There is industrial logic to doing M&A deals,” said Ajay Asija, the group head of financial institutions at Westside-based investment bank B. Riley Securities, a subsidiary of Riley Financial Inc. “Banks do need to consolidate, and I believe they will. I don’t think it’s going to happen anytime soon, definitely not in the fourth quarter.”

The bespoke nature of the Banc of California deal is a rarity, with its private equity infusion and reverse merger structure uncommon in banking deals, according to Asija. Most bank boards are closely watching market conditions this quarter, looking for signs of life in commercial real estate and credit health before beginning deal discussions, as entities across the country were exposed for interest-rate mismanagement. 

Preliminary calls by the Federal Deposit Insurance Corp. and the Federal Reserve last month to require banks to issue more long-term debt for increased loss capacity, are still premature to spur immediate bank action.

This week’s Federal Reserve meeting could outline a timeline for next year’s banking deals, with the Fed rumored to be holding off on a hike for the first time since March of last year. If rates don’t increase past the fourth quarter, the waiting period for further clearing events on the regional banking index could be shorn. 

Also in this report: CNB Reaches Out

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