US Community Banks Near Inflection Point–Consolidation to Accelerate During Recovery
U.S. community and regional bank mergers and acquisitions activity is recovering quicker than expected, which bodes well for the structural bank consolidation trend in the coming years, according to McLean, VA-based investment manager, FJ Capital Management (FJ Capital), an SEC-registered investment advisory firm founded in 2007 that manages approximately $800 million in net assets.
The white paper, “Community Banks Reaching Positive Inflection Point,” addresses the most frequently asked questions from investors, and FJ Capital maintains that while M&A trends tend to drop off at the beginning of a credit cycle, which occurred earlier this year, the recent uptick in activity signifies the industry appears poised for the trend to continue in 2021 and beyond. FJ Capital believes the number of banks will decline by more than 50% over the next 10 to 15 years.
“We are encouraged by the recent uptick in M&A activity,” says FJ Capital Founder and Portfolio Manager, Martin Friedman. “Based on our analysis, we believe we’ve hit a turning point in the credit cycle and are reaching a positive inflection point in community and regional banks.”
The paper also addresses the significance of loan payment deferrals trending downward in recent months and expectations for a continuation into year end. FJ Capital believes the drop in deferrals in the second half of 2020 will serve as a positive catalyst for banks, providing more clarity on the ultimate credit losses in this recession. FJ Capital’s proprietary credit loss sensitivity analysis demonstrates how banks can absorb draconian losses without raising capital or degrading tangible book value by stress testing extreme credit loss scenarios, including levels exceeding the Global Financial Crisis loss content, and finds that banks are on solid footing with current capital levels, despite the uncertain economic environment.
The report refutes concerns about the long-term net interest margin outlook for the banking sector and illustrates how small and mid-cap banks will likely see net interest margins bottom around 3% versus 3.5% in 2019, even if interest rates stay at 0% forever. FJ Capital’s analysis shows that even assuming a low rate environment forever, there is more than 80% upside to fair value from current levels.