Insider buying at banks is a bullish indicator. The bank industry entered the second quarter under duress, and plenty of clouds linger, but one very bullish sign is the surge in insider buying. Specifically, the number of insiders making open market stock purchases spiked to 960, even exceeding the figure posted in the first quarter of 2020 when the entire world was shutting down.
Figure 1: Nearly 1,000 bank industry insiders made open market stock purchases in 2Q23
Source: FactSet
Banc of California - PacWest merger looks like a win-win, all things considered. The PacWest saga appears to have resolved about as favorably as one could reasonably hope, with the announcement of its acquisition by Banc of California. With projected cost saves of $130 million, or about 15% of the pro forma expense base, the management projects the transaction to be accretive to both EPS (over 20% accretion) and tangible book value (3% accretion). This is despite the (admittedly minor) headwind of the Durbin amendment; Banc of California stands to lose $1.25 million in annual interchange revenue as it surpasses the Durbin asset threshold. Notably, Banc of California CEO Jared Wolff was previously General Counsel and a director of PacWest; his knowledge of the target suggests relatively low integration risk.
Figure 2: 89% of BANC deposits are domiciled within 5 miles of a PACW branch
Source: FactSet
Branch network overlap is substantial. As the map below illustrates, Banc of California’s branch network sits side-by-side with that of PacWest. Five Banc of California branches holding 28% of the bank’s deposits are within a quarter-mile of a PacWest branch; nobody walks in L.A., but at least in this case, one has the option. Fully 89% of Banc of California’s branches are domiciled within five miles of a PacWest branch, although in some parts of southern California that is a distance best travelled by helicopter, so branch redundancies may be a bit less than proximity may suggest.
Figure 3: The Banc of California and PacWest branch networks largely overlap
Source: FactSet
More an echo of the bank crisis than a harbinger of increased M&A. There is some base level of bank M&A in every environment, and there will be other transactions in the current one. We are reticent to view this as a sign of an incipient M&A boom, however. For all the speculation about an uptick in bank mergers (full disclosure: we detailed the reasons for our skepticism regarding this thesis in our June report) the nature of this transaction seems more an echo of the crisis of early 2023—a mopping up of lingering problems—than a sign that otherwise healthy banks are poised to give up the ghost.
Figure 4: PE investors will own 20% of the combined company
Source: FactSet
Private equity has a (constrained) role in the industry. We did agree with speculation that the bank crisis would present incremental investment opportunities for private equity in the industry, and this transaction is a manifestation of that. Concurrent with the closing, Warburg Pincus and Centerbridge will invest $400 million, in exchange for 20% of the combined company, and one board seat.
Little good news on the rate front. As the following charts illustrate, the yield curve remains inverted with the 2-10 spread just barely off a very deep bottom. Fed Funds futures continue to price in incrementally more hawkish probabilities; Figure 7 shows the continued increase in the probability-weighted rate expectations for the 1Q24 FOMC meetings, and Figure 8 shows that in the past week, the expected start of Fed easing has moved out from March 20 to the May 1 meeting.
Figure 5: The yield curve remains inverted
Source: FactSet
Figure 6: The 2-10 spread is off the lows but remains very unfavorable for banks
Source: FactSet
Figure 7: Market expectations for the 1Q24 FOMC meetings continue to grow more hawkish
Source: FactSet
Figure 8: Fed Funds Futures imply the first rate cut has shifted from March to May of 2024
Source: FactSet
July 26 Federal Reserve balances tick up slightly. Total bank borrowings (BTFP combined with the Discount Window) rose 1.7%. At $107 billion, it remains well within the range of the past couple months, but it would be encouraging to see it begin trending down. Money market fund balances rose 52bps to $107 billion, while large US banks saw deposits decline by 23bps. Total loans in the banking system rose 14bps and are now in positive territory quarter-to-date.
Figure 9: Federal Reserve balances
Source: FactSet
Figure 10: Bank Term Funding Program usage reached another new peak last week
Source: FactSet
Figure 11: Money Market Fund assets hit a new high last week
Source: FactSet
Figure 12: Overall deposits rose, but large banks saw a decline
Source: FactSet
Figure 13: Total loan growth is now positive, quarter-to-date
Source: FactSet
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