Asian banks can expect a favourable reception if they are looking to expand in the US, according to Tom Michaud, chief executive officer and president of financials-focused investment bank Keefe, Bruyette & Woods. A number of recent deals point to increasing interest in the US market by Asian banks that see opportunities to get good deals.
“The US is ahead of the rest of the world in terms of the balance sheet integrity of the banks,” said Michaud in New York, making it an attractive target market for expansionary Asian banks. Michaud points to two recent deals as indicative of this level of interest: ICBC’s acquisition of an 80% stake in Bank of East Asia’s US unit and the acquisition of Pacific Capital Bancorp by Union Bank, a US subsidiary of Mitsubishi UFJ Financial Group (MUFG).
With ICBC’s acquisition, the important signal was not the size of the deal, which at $140 million is not large. Rather, it reveals ICBC’s international ambitions, as well as its willingness to subject itself to the rigours of the US regulatory regime.
“This will be a really important signalling moment for the Chinese banking industry,” said Michaud. “You have the national champion of China looking to acquire in the US. Until then a Chinese bank had not been really acquisitive here, so this is a really big test case.”
That deal is still awaiting regulatory approval, even though it appears as if it was agreed at the highest levels. “They announced that deal on the day the Chinese president was visiting the US,” said Michaud. “When I see that, I think there is no accident that that happened. The Fed hasn’t given approval yet but my view is that they will get the approval, but there may be some growth restrictions on it.”
Japanese banks are also expanding overseas, buoyed by their strong capital positions and weak growth prospects at home — reinforced last month by MUFG’s expansion through its acquisition of Pacific Capital.
“[MUFG] paid a very high price for it [1.6 times book] but obviously believe investing in their US franchise was better than investing in other areas of the world.”
Another factor spurring the market is the presence of highly motivated sellers, especially European banks that need to slim down internationally while raising dollars. Michaud said this is not due to negativity towards the outlook for the US banking market but because of problems at home.
“The European banks are exiting the US, not as a statement about what they see as the opportunity in the US, rather it is just that they need the capital and that is the least dilutive, most shareholder-friendly way to do it. “
Asian banks looking to expand in the US however should not expect an easy ride of it. The Federal Reserve will scrutinise potential deals just as scrupulously as any domestic transaction.
“The Fed has been steadfast in their approach to regulating banks and they have been unyielding” said Michaud. “They expect any bank operating in the US to abide by their rules and they won’t change that for political reasons.”
But by agreeing to do deals, Asian banks show they are willing to undergo what can be a very testing experience. And that speaks volumes about their global intent. “I think this ICBC deal is important. The capacity to buy in the US is quite important and it sends an important message that they are willing to operate under the US regulatory regime, which is quite strenuous. It sends an important signal about ICBC that is very positive.”