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The conversions of major investment banks such as Goldman Sachs (NYSE:GS) and Morgan Stanley (NYSE:MS) to bank holding companies likely suggest they will be interested in acquiring commercial banks, several industry sources told mergermarket.
M&A was not the primary motive behind the switches, and the difficult financial climate might delay the idea for months or longer, some of the sources added. However, the bundling of financial services will be key to the companies’ survivals, as standalone investment banks seem to represent an outdated business model, two bankers said.
The New York-based financial giants announced plans to convert to bank holding status in September, at the height of market fears following the collapses of AIG and Lehman Brothers and the announcement of Merrill Lynch’s buyout by Bank of America. St Petersburg, Florida-based investment bank Raymond James Financial (NYSE:RJF) followed shortly behind, announcing its own plan to convert to a bank holding company.
Their participation in the government’s capital infusion program should help Goldman Sachs and Morgan Stanley to pursue buys, as many banks have suggested they will do with the money, one of the bankers said. The two investment banks are in line to receive USD 10bn each from the program.
While they would like to get their own businesses in order before making acquisitions, the banker added that they should move quickly to take advantage of depressed prices before the market rebounds. A second banker and a lawyer predicted the companies would take some time to manage their internal challenges before making buys.
An industry source familiar with regulatory issues said these types of acquisitions would likely not be far out in the future, after a bit more stabilization in the market. The banks are already significant competitors, Goldman Sachs with USD 20bn to 25bn of bank assets and Morgan Stanley with about USD 26bn of bank assets, the source estimated. Thus they will make the necessary moves to remain competitive and to continue to have access to adequate deposits, the sources said. Goldman Sachs plans to operate under a state banking charter in New York, while Morgan Stanley is using a national charter.
For its part, Raymond James views the switch as a change that is ”more form than substance,” according to the comments of Thomas James, chief executive officer, in the press release announcing the move. Raymond James already had a commercial bank operation with a thrift status that held USD 7.7bn in deposits as of 30 June. The company indicated the change of status will free it to do more corporate lending, which the company views as historically more profitable.
Another consideration resulting from the conversions to bank holding companies is the possibility of divestitures, one industry source said. The companies will now fall under stricter regulations related to their capital ratios and could use divestitures as a way to bring their capital structures into compliance. They will have two years to come into compliance with the rules, the source added.
On the acquisition front, the major investment banks are likely to be very selective, the second banker said. For example, Goldman Sachs would have trouble finding a US commercial bank brand that carries the same prestige as the Goldman Sachs name, the banker surmised, and so it might consider buying a foreign-based retail bank.
While teaming up with a major commercial bank would ultimately bring greater stability, investment banks also would have to be careful to guard their profitability when making an acquisition, the second banker added. Major investment banks have a high revenue-per-employee ratio that could be heavily undermined by buying a commercial bank, which typically has many low-level employees.
However, the first banker pointed to JPMorgan Chase as an example of a well integrated banking company that offers retail banking and investment banking, yet traditionally produces good profitability. Also, he noted that Morgan Stanley already has retail locations in its wealth management business and could build its banking services through those locations.
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