Strong regional banks to gain from private equity rules - KBW

Strong regional banks will gain from the proposed curbs on private equity investments in troubled U.S. banks as they will now be able to buy these failed institutions from a top banking regulator, according to Keefe Bruyette and Woods.

Analysts, including Frederick Cannon, expect the number of U.S. bank failures to rise rapidly in 2009 and 2010, but said the pace of failures may be slowed by resource constraints at the banking regulator, the Federal Deposit Insurance Corp (FDIC), and by a low FDIC deposit insurance fund balance.

U.S. banking regulators, executives and an industry body last Thursday proposed tough guidelines under which private equity groups seeking to buy failed U.S. banks would have to maintain very high capital levels and remain owners for three years.

"We believe these proposed rules indicate that the hurdles to private equity investment in failed institutions are likely to remain high for an extended period of time," KBW analysts wrote in a note to clients.

So, at least in the near term, existing banks would appear to have an advantage in purchasing failed institutions, the analysts said.

"The beneficiaries of these trends will be the regional banks with the capital, credit quality and management talent to purchase failed institutions from the FDIC, and expand their banking franchises," the analysts said.

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They identified 17 banks as the gainers: BB&T Corp (BBT - news), Columbia Banking System Inc (COLB - news), City National Corp (CYN - news), First Financial Bancorp (FFBC - news), First Niagara Financial Group Inc (FNFG - news), German American Bancorp (GABC - news), Hancock Holding Co (HBHC - news), IBERIABANK Corp (IBKC - news), Old National Bancorp (ONB - news), PacWest Bancorp (PACW - news), Peoples United Financial Inc (PBCT - news), Prosperity Bancshares Inc (PRSP - news), SCBT Financial Corp (SCBT - news), Trico Bancshares (TCBK - news), U.S. Bancorp (USB - news), WestAmerica Bancorp (WABC - news) and Western Alliance Bancorp (WAL - news).

Banking regulators on Thursday closed seven institutions, bringing the total number of U.S. bank failures to 52 so far this year. There were 25 bank failures last year, and just three in 2007.

The number and cost of failed banks will continue to increase rapidly, requiring further "special assessments" of banks that could add significantly to bank regulatory costs, KBW analysts said.

The FDIC has faced a sharp uptick in failed banks as loan portfolios continue to deteriorate following the bursting of the housing bubble.