A decline in the number of U.S. bank and thrift consolidations in 2012 is a credit positive for municipal bonds, Moody’s Investors Service said.
The reduction of consolidations will improve banks’ ability to provide credit to the municipal sector, according to Moody’s senior vice president Allen Tischler.
Tischler examined Federal Deposit Insurance Corporation numbers for unassisted mergers and acquisitions of failed banks.
The number of consolidations for the first quarter of this year, when annualized, is 46% lower than the average for 2002 to 2011. The average level of bank and thrift consolidations from 2002 to 2011 was 320 per year. The annualized figure for this year’s first quarter was 172.
“Seasonal factors do not account for the decline since consolidation in the first quarter of 2012 was down 48% compared with the first quarter of 2011,” Tischler wrote.
Bank combinations occasionally improve banks’ credit, Tischler acknowledged. However, “we can point to numerous bad acquisitions that undermined an acquirer’s franchise value, the most prominent recent examples being Bank of America Corporation’s (Baa1 review for downgrade) acquisition of Countrywide and Wachovia’s purchase of Golden West. Bank of America continues to suffer from its acquisition of Countrywide and Wachovia nearly failed after Golden West’s pick-a-pay mortgage portfolio deteriorated. Wells Fargo & Co. (A2 negative) eventually acquired Wachovia at a steep discount.”
Munis are affected by banks’ credit, Tischler wrote in an essay in Tuesday’s “Moody’s Weekly Credit Outlook: US Public Finance Edition.” “Larger banks that tend to be acquirers [of other banks] are important providers of credit to the municipal sector through lines of credit (LOCs) and direct loans. Credit stability makes them better able to provide credit to the municipal sector. If a bank providing LOCs is less likely today than a few years ago to make a difficult and risky acquisition, state and local governments with puttable variable rate debt that re-prices based on the bank’s LOC will be less likely to have to seek substitute support facilities as a result of acquisition-related credit stress on the bank.”
The trend to fewer consolidations is thus a credit positive not just for the bank sector but also for the municipal sector, Tischler wrote.
The decline in mergers in the first quarter reflects banks’ and regulators’ “greater discipline” in evaluating potential acquisitions, Tischler wrote. It also reflects an uncertain economic environment and persistent low interest rates. Potential sellers are not lowering their prices to reflect this difficult situation, he wrote.
