As Low Rates Hammer Banks, Here’s a Silver Lining for Investors
Record-low interest rates will prompt some banks to consider selling out
By Aaron Back
Plummeting interest rates are putting intense pressure on banks. For some lucky shareholders, though, there could be an unexpected benefit: greater impetus for mergers among lenders.
One of the clearest fallouts from the U.K.’s decision to leave the European Union has been a sharp decline in interest rates world-wide. In the U.S., the yield on 10-year Treasury notes fell to 1.37% on Tuesday, a new historic low, from 1.74% before the U.K.’s vote.
For banks, this is surely bad news as the profits they earn on loans will fall. Many had hoped that this would be the year that lending margins would finally rebound, helped by Fed tightening. The silver lining for investors is that bank managers who have been waiting for higher rates might now throw in the towel and consider selling out to interested bidders.
In recent weeks, there has been an uptick in bank-merger activity that could herald a sustained increase, says Christopher McGratty, analyst at Keefe, Bruyette & Woods. Last week, for instance, Canadian Imperial Bank of Commerce CM -0.40 % agreed to acquire Chicago-based PrivateBancorp PVTB -0.65 % for $3.8 billion. This deal stands out, says Mr. McGratty, because PrivateBancorp’s balance sheet is especially sensitive to changes in interest rates.
Due to regulatory scrutiny on big banks, most deals are likely to be between smaller, regional lenders. But there could be one notable exception: Comerica, CMA -3.45 % with $69 billion of assets and operations in Texas, California and Michigan, has been under pressure from investors and analysts to consider selling off part of its business.
Now, Comerica and its industry will have to move to Plan B. That puts M&A back on the table as a way to appease long-suffering shareholders.