The worst of the credit crisis has passed, but many banks are still living on borrowed time. So contends Kamal Mustafa, the chairman and chief executive of Invictus Consulting Group in New York, which specializes in stress-testing banks.
Mustafa says some 2,000 banks should be trying to find buyers. The Invictus chief knows a few things about consolidation, having served as the head of global mergers and acquisitions for Citibank, along with the investment banks BlueStone Capital and Wildwood Capital.
Unlike many other deal-happy investment bankers, he has become concerned about banks that are acquiring mortgage portfolios, credit cards and specialty assets for the sake of growth.
(Commercial banks dominate the residential lending business, though some are beginning to close certain production channels, including Wells Fargo, which recently made the decision to halt funding through loan brokers.)
One of Mustafa’s chief concerns is the fact that new loans are coming on the books at lower spreads, which creates yield compression.
For a bank to effectively be in a position to improve earnings, it needs less competition within their geographical footprint and the ability to increase existing loans within their existing cost structure, he said. This means bank or bank asset acquisitions.
He estimated that roughly 2,000 banks likely will limp along with such low or negative returns over the next four years—barring a major miracle—that they don't have a financial reason to exist. Those banks have to be assimilated into the marketplace.
Banks facing bleak prospects need to recognize that capital losses, increasing regulatory capital requirements, and declining [loan] volumes and spreads will inevitably reduce their market value, he noted. Those are the banks that should be selling today.
