Where two financial institutions offer similar services and have the same target audience, merging may prove beneficial.
Merger not only strengthens the asset portfolio and market position of a bank, it also provides economies of scale. This enables the bank to adopt a competitive pricing policy to lure more customers. Recently, CapitalSource, Inc. (NYSE:CSE) and PacWest Bancorp (NASDAQ:PACW) have gone one step ahead by merging together to enhance their service portfolio and better serve their clients.
Value creation resulting from the merger
This merger strengthened PacWest Bancorp (NASDAQ:PACW)’s market position in California, making it the 6th largest bank in the state with a total of 96 branches operating in California. The bank will now own a total of $15 billion in assets. The merger has also resulted in diversification of the bank’s loan portfolio. It will now be serving the clients in a broader market. The merger supports PacWest Bancorp (NASDAQ:PACW) growth as a business-focused bank. It provides PacWest a significant opportunity to attract CapitalSource, Inc. (NYSE:CSE) loan customers as depositors.
The merger of PacWest and CapitalSource, Inc. (NYSE:CSE) is a financially compelling opportunity. The deal is expected to result in 9.4% and 18% accretion to Earnings Per Share (EPS) by 2014 and 2015 respectively, after including the estimated synergies. This will raise PacWest’s stand-alone expected EPS of 2014 and 2015 from $2.17 to $2.37 and $2.39 to $2.82 respectively. It is forecast to add 10% value to the bank’s tangible book value per share. Return on average tangible book value per share is expected to reach approximately 17% and return on average assets to rise to 1.65% by 2015.
The bank will also be able to maintain a strong capital position with a 11.7% tier 1 common equity ratio, a 10.5% total capital ratio and 15.7% total risk based capital, based on IBES consensus estimates.
PacWest has a track record of being a disciplined acquirer and experienced integrator. However, Block & Leviton LLP has begun scrutinizing this merger on the basis of a possible infringement of fiduciary duty by the board of directors of CapitalSource, Inc. (NYSE:CSE) in failing to maximize shareholder value with the proposed acquisition by PacWest. If the case is proven right, then PacWest may be forced to pay a higher price for this acquisition which would reduce the net synergies realized. However, it will benefit the shareholders of CapitalSource.
The current status of rivals in the banking industry
Bank of America Corp (NYSE:BAC) is also a key player in the U.S. banking industry.
The bank’s total deposits stand at $1,081 billion, with 20.5% share coming from California’s deposits. The bank serves approximately 52 million consumers and small business relationships, with nearly 5,400 retail banking offices and approximately 16,300 ATMs.
The change in regulatory policy announced by Ben Bernanke on 2nd July demanded large internationally active banks to report their leverage ratios after incorporating off-balance sheet risk exposures. Bank of America Corp (NYSE:BAC) falls under this category. This will increase the reported asset base and reduce the leverage ratio reported by the bank. The Fed is expected to raise the minimum supplementary leverage ratio to 5-6 percent for all holding companies. The bank reported its tier 1 leverage ratio to be 7.49 percent, as of June 30, 2013. If this proposed regulation is approved, this would put Bank of America Corp (NYSE:BAC) at the risk of failing to meet the new regulatory requirement as it expects supplementary leverage ratio to be approximately 4.9% – 5.0%.
Bank of America Corp (NYSE:BAC) has recently been directed to confront Texas property fees suit relating to the fees it attempted to evade by using MERS to track property transactions.
Conclusion
The combined company’s shareholder returns and capital ratios will be among the highest in the U.S. PacWest provides CapitalSource a steadier and lower cost deposit base while CapitalSource will help PacWest by providing a more strong and diverse lending presence. In the light of the PacWest’s bright outlook, I would recommend buying this stock. The bank also provides a regular stream of income in the form of dividends, with its dividend yield rising at a CAGR of 22.39% in the last three years.
Bank of America Corp (NYSE:BAC) should be sold due to it’s continuously rising NPLs, weak ROA 0.74% owing to the drastic decline in its interest and non-interest income, very high efficiency ratio of 85.59%. The recent changes expected in the laws also put the bank at high risk of failing to meet the regulatory requirements in the future and to tie up additional capital.
Awais Iqbal has no position in any stocks mentioned. The Motley Fool recommends Bank of America. The Motley Fool owns shares of Bank of America. Awais is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
The article This Bank Is Well Positioned to Lead California’s Market originally appeared on Fool.com is written by Awais Iqbal.
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