An M&A restructuring will sweep across the Midwestern banking space over the next 18 months, and Stifel, Nicolaus Managing Director Anthony R. Davis says investors should have exposure to banks that win market share through superior execution, lower their costs and successfully integrate acquisitions.
“You have to remember that the 12 Midwest states are home to 45% of the country’s banks but only 23% of the U.S. population,” Davis said. “For the Midwest’s banking-to-population ratio to reach parity with the rest of the country, 175 banks would have to be merged out of existence every year for the next decade. While excess capacity will mandate further consolidation throughout the industry, nowhere is this more urgent than in the Midwest.”
Davis recommends PrivateBancorp (PVTB) for its ability to win market share and lower credit-related expenses, and he also points to MB Financial (MBFI), which has lowered costs while demonstrating it has structured and successfully integrated acquisitions.
“Chicago-based MB Financial,” Davis said, “has completed six acquisitions over the last two years and has grown core earnings by over $0.60 per share in the process. As of year-end 2010, we believe that 50 of the 240 financial institutions operating in metro Chicago had Texas ratios above 100%. Although the FDIC closed no Illinois-based banks during 4Q10, that agency hasn’t recruited 400 employees for its third U.S. satellite office for the fun of it. We expect a ‘break out’ of M&A activity in Chicago in 2011-2012.”
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