It is now clear that the COVID pandemic has exerted a significant blow to our economy and the recovery outlook is bleak. Financial pressure on regional banks is mounting. The recent Wall Street Journal article on the situation facing the Bank of Hope (15 Sept. 2020 California’s Bank of Hope Was a Symbol of Success. Now It Faces a Covid-19 Reckoning) may unfortunately signal a more macro challenge for the banking industry, rather than being an isolated incident.
Although the smaller banks are taking precautionary measures by increasing loan loss reserve and stock buybacks to buffer further market downturn, these actions may not be sufficient to sustain their operations. It is anticipated that loan demand will remain anemic and deposits will continue to be lost to clients choosing to take their chances in the stock market. Concurrently, bank shares are being repurchased at a discount as high as 20% below book value!
But, every crisis brings new opportunities.
The fintech powered non-bank lenders have benefitted from having more nimble operating systems and lighter touch regulatory environments. They have been able to adapt their underwriting and loan servicing in short order to better navigate the challenges. With the liquidity in the capital markets they also continue to attract strong interest and support of the private equity market. Not all will be winners, but the fintechs that come out of the pandemic in tact will be well positioned to consolidate their position through strategic acquisitions at a time when the price tag of target banks is dipping. HSBC's share price yesterday hit an all time low.
So maybe now is the right time for the winning non-bank lenders to consider buying a bank?
A bank license strengthens marketing and operating platforms thus further improving return on equity. A bank license also allows a fintech to capture deposits thus lowering the cost of funds and provides an in-house mechanism to streamline the funds settlement process thus increasing non-interest income (float and fee).
The key is to secure a bank license and size of the bank therefore will be of secondary concern. There are a select number of smaller banks that would make appropriate targets which are considering a new strategic direction and open for discussion. Banks, whether public or private, are also ideal structures to raise fresh capital if there is a growth story to be told.
We look forward to continuing the dialogue on this with our fintech clients and capital providers.
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