Saturday, March 05, 2011

How to Profit From Bank Failures

Guess which sector is showing the greatest activity in M&A? Energy? Mining? Tech? No, it's the regional banks, courtesy of the FDIC. Since the beginning of 2009, 327 banks have become insolvent; in just the last two months 30 have collapsed.

One way or another, the bank and thrift industry is consolidating. The situation is hardly news. This country is wildly overbanked. We have thousands of banks when other countries have hundreds. Or in the case of Canada -- five.

Every Friday, the FDIC announces those banks that have bitten the dust. And every Friday we learn which financially-sound banks have won their bids to acquire the assets and deposits of these insolvent institutions. The winning banks usually obtain the deposits without a premium. They take over the assets with a government guarantee covering 80% of each loan's potential losses.

This "M&A" occurs without middle men: there are no investment bankers to be paid and no "paying up" to purchase companies. In fact, often the failed bank's assets are bought at bargain basement prices.

The last 2 years have been very active. What does the future look like for this market?

The FDIC reports 884 problem banks with $390 billion in assets. It is likely this financial crisis will see the vast majority of the 884 "iffy" banks crumble. $390 billion is a huge potential market. In the last financial debacle (1989 - 1993), over 1,700 banks closed, with 20% of all banks closing or acquired. Bank colossuses formed. We're seeing a replay of that period. Over the next two years, many hundreds of teetering banks will close on a Friday and reopen on Monday under sound management backed with solid finances. The 7,700 current banks will probably dwindle to less than 7,000.

The winners: the regional banks that have been stepping up to the plate.

If you want to acquire share in regional banks which have been particularly active in this market, you should consider: New York Community Bancorp (NYB), Bank of the Ozarks (OZRK), First Citizens BancShares (FCNCA) - with an interest in Home Bancshares (HOMB), Umpqua (UMPQ), and City National (CYN). These solid operators have purchased failed banks repeatedly. BB&T (BBT), after its huge buy of Colonial, is also of interest. These Regional Banks that are Eating Other Banks are able to grow their asset and deposit bases with little to no risk of failure.

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