What are we looking for?
Sizeable banks that could profit from further U.S. regional bank collapses.
The screen
Amid a wave of banking hysteria last week, Toronto-Dominion Bank terminated a deal worth US$13.4-billion to purchase Memphis-based regional bank First Horizon Corp. The turmoil continued as the share price of PacWest Bancorp, a California-based regional lender, fell over 41 per cent after it confirmed it was exploring “strategic asset sales.”
It is becoming increasingly evident that the collapse of Silicon Valley Bank may have just been the tip of the iceberg for a drawn-out regional banking crisis in the United States.
While small regional banks are facing liquidity pressures and shrinking deposits, those same deposits are going somewhere – providing abundant opportunity for the largest banks to capture additional business. Moreover, large banks with excess liquidity have a rare opening to opportunistically acquire smaller banks because of favourable assurances from the U.S. Federal Deposit Insurance Corp. Look no further than JP Morgan’s acquisition of First Republic Bank to see the vast opportunity that megabanks have.
We began identifying banks that could benefit from this trend by using FactSet’s Universal Screening tool, using the following parameters:
- Traded on a U.S. or Canadian stock exchange;
- Classified within the banking sector, according to FactSet;
- Total assets greater than US$500-billion;
- Market capitalization greater than US$50-billion.
We ranked the eight companies that emerged using a multifactor ranking of their loan-to-deposit ratio (lower figures are preferred), debt-to-equity ratio, total assets and Tier 1 capital ratio (a regulatory measure of a bank’s financial strength, followed closely after the 2008-2009 banking crisis). These ratios provide a blended view of liquidity, leverage, size and financial strength that are relevant to the banking industry.
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What we found
JPMorgan Chase & Co., the largest U.S. bank by total assets, ranked No. 1 on our screen with an exceptionally low loan-to-deposit ratio and high Tier 1 capital ratio. The bank reported its most recent quarterly results on April 14, raking in record high revenues of US$38.4-billion. The bank also continues to benefit from rising interest rates, earning US$20.8-billion in net interest income for the quarter, up an astounding 49 per cent, year over year. JPMorgan’s acquisition of First Republic Bank was won through a competitive bidding process, and our screen suggests that it remains well-positioned to contend in future bids.
Bank of Montreal, Canada’s fourth-largest bank by assets, ranked number three overall on our screen. BMO has the best Tier 1 capital ratio among the group, making up for its relatively fewer total assets. It also derives the highest proportion of its revenues from U.S. markets of any Canadian bank, further bolstered by its recent acquisition of Bank of the West, a California-based bank. This may act as a double-edged sword – BMO is well-versed in U.S. markets; however, it may also face headwinds if Bank of the West encounters liquidity pressures. BMO’s chief executive officer, Darryl White, does not seem worried, as he reassured investors on April 18 that BMO has no liquidity concerns.
Arjun Deiva, CFA, is Regional Director of FactSet Canada’s Consulting Division.
Disclaimer: The author personally owns shares in JPM, RY, TD, BMO, BNS and CIBC.
The information in this article is not investment advice. FactSet assumes no liability for any consequence relating directly or indirectly to any action or inaction taken based on the information contained above.