ABA Banking Journal - November 2008 - (Page 14)

briefing confidence,” says Dunne, a 30-year veteran of investment banking, most of it centered on financial institutions. “It’s all about securities we can’t sell and that we can’t find a floor for what they are worth. The government is going to provide that floor.” One wrinkle of the rescue package as originally passed is the federal government’s acquiring ownership interests in the course of buying assets from the large players. That provision “is candidly political in nature,” says Dunne. Yet it is a price he sees those players being quite willing to pay for critical aid. The newer plan, which draws on TARP’s planned $700 billion, is yet another wrinkle. Dunne never saw passage of the aid package as the final solution nor the end of the story. The country faces a period of economic pain and deleveraging. “The most we can hope for is for the economy to suffer for [only] nine months. Maybe it will even be for a couple of years,” says Dunne, interviewed in October a few days after President Bush signed the new law (and again in the wake of the capital infusion announcement). “That is the overriding problem for all financial institutions.” that these institutions know how to riskweight credit appropriately, because more borrowers will be coming to them. Investors will look to such institutions because “there will be higher rates to the borrowers, but also much higher spreads to those banks.” The third factor will be the ability to demonstrate that the bank enjoys a solid core funding base—plus the ability to build that base over time. In this context, says Dunne, he is referring to true core funding—strong retail and small business deposits. Institutions that rely too much on Federal Home Loan Bank advances and similar funding will not be perceived as having a reliable base. Dunne says the markets have already underscored this aspect of investor preference. Back in 2006, he says, two banks with equally strong performance records might have relied on completely different funding strategies—one based on core funding, the other on nontraditional, capital markets funding—and still have been traded at roughly the same priceearnings multiples. But that’s changed, now, he says. Investors favor companies with strong core. Such institutions will enjoy an advantage. “It’s going to be that important,” says Dunne. New on ababj.com Treasury’s capital infusion augments private sector sources In assessing the impact and advantages of the Treasury’ Oct. 14 bank recapitalization plan, bankers should consider the alternatives and options. On our website, under “Exclusives” the article bearing the same headline as that above explores one such option— private equity. “Earlier this year,” it begins, “Boston Private Financial Holdings, Inc., raised more than $185 million in new equity capital using a blend of sources that may be a model for the industry’s future. “Boston Private, a $6.9 billion holding company owning banks and other affiliates specializing in wealth management, had two needs for capital: to cover credit losses in California, and to fund future growth. “Ultimately, the company drew on both public equity and private equity.” The private equity came from the well-known Carlyle Group, which was a key factor in tapping the public markets. • A companion article and podcast gives a detailed explanation of the Federal Reserve’s Sept. 22 decision to ease its restrictions on private equity investments in banks. Finding capital for change Going into this period, Dunne’s advice to banks is simple: Get capital. To which he adds the proviso, if you can. Though his company arranged plenty of trust preferred in recent years, he doesn’t see that instrument being terribly attractive to investors in the current environment, nor debt. Instead, there will be a return to simplicity. So those who can raise capital should be looking at fresh common. The banking business is going to come down to two categories of institution, Dunne warns: “Those that can and those that can’t” raise common. [The mid-October government capital program announcement indicated that $250 billion of the TARP funds would be made available for capital infusions in the form of nonvoting senior preferred stock. The large banks initially brought into the capital program account for $125 billion of that. ABA made the point in a statement addressing the program that it did not expect most banks to tap the new effort, as 95% of the industry is well capitalized.] How can a bank raise common in today’s markets? Dunne puts it down to three key factors. First is having a respected management team that is realistic regarding where their organization stands, and what its future holds. Second is having a business plan in place, and communicated to investors, that is simple and straightforward. Today the market wants to see successful, basic blocking and tackling. Regarding this point, Dunne says that mid-sized and smaller institutions with such strategic plans will have to demonstrate that they know credit—demonstrated by decent portfolios—and know their clients. Investors will want to see M&A wave coming Institutions featuring these three factors will be able to raise capital. Those that can’t, he says, must hope that the recession doesn’t last too long. If that isn’t the case, continues Dunne, such institutions will find themselves vulnerable to acquisition by those who can raise capital. The latter “will be in an extremely strong position over the next several years,” Dunne says. (At the same time that Bank of America was pushing a large common-stock offering, some community banks had successfully gone to market for secondary offerings.) Dunne suspects that in about 18 months, there will be a major consolidation wave among the roughly 2,000 banking companies that are actively publicly held. The many private banks won’t feel the same pressures to consolidate and will move more slowly in this regard, he continues. But among the active players, there will be many smaller deals, that will nevertheless lead to a 30% shrinkage in institu- 14 NOVEMBER 2008/ABA BANKING JOURNAL Subscribe at www.ababj.com http://www.ababj.com http://www.ababj.com//content/view/559/121/ http://www.ababj.com//content/view/560/121/ http://www.ababj.com

Table of Contents Feed for the Digital Edition of ABA Banking Journal - November 2008

ABA Banking Journal - November 2008 Contents Editor's Column Banking 2.0: Credit, Banking's Essence, Set for Rethinking Snapshot: The Few, the Proud, the Banks that Can Raise Capital Will Strong and Simple Banks Inherit the Business? Back to the Future ABA Resources ABA Chairman's Position Farm Lenders Must Take Care When Lending in Indian Country Pass the Aspirin Into the Breach Adventures Across A Century What the Future Holds, Post Crisis Paul Volcker: A Financial Legend Still Speaks Strong Ed Yingling: Weathering the Storm Dick Kovacevich: "Boring" Banking to Dynamic Financial Services Jim Culberson: Community Banking: What has Changed and What Shouldn't Walter Shipley: How a Chemical Reaction Helped to Mold Today's JPMorgan Chase William Isaac: Challenges and Opportunities Ahead for Banks A Hundred Years from Our Pages Eight Tech Innovations that Brought Banks into 21st Century Bank Cherokee: Third Generaton Marks 100th Year The First National Bank of Altavista: Railroad Gave Birth to a Town, a Hope Chest, and a Bank Rosedales Federal Savings and Loan Association: How a Friendly Game of Cards Turned into a 100-Year Mutual New Washington State Bank: Cooking Up the Next 100 Years Mailbox Banker's Mart To Advertise/Index of Advertisers The Economy

ABA Banking Journal - November 2008

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