May ’17

The BAN Report: Curry Out / CIBC Blinks Again / Auto Loan Problems Stress Used-Auto Prices / Family Offices Go Solo-5/3/17

Curry Out

Thomas Curry, an appointee of President Obama, is stepping down tomorrow with Keith Noreika set to become acting Comptroller of the Currency.     As head of the largest US banking agency (the primary regulator for 75% of the US banks by asset size), this is President Trump’s first major step in re-shaping the regulatory regime in Washington.

“This is the Trump administration’s long-awaited first step, albeit small, toward replacing Obama administration bank regulators,” said Ian Katz, an analyst with Capital Alpha Partners. “There will be many more.”

The administration’s critics have taken notice, with Sen. Sherrod Brown, the lead Democrat on the Senate Banking Committee, knocking Curry’s ouster as a further example of the Trump administration eroding the regulatory safeguards put in place since the 2008 financial crisis.

Marcus Stanley, policy director for Americans for Financial Reform, said Curry’s departure — itself a somewhat unusual circumstance — puts the controls of a critical supervisory agency in the hands of a bank-friendly administration.

“This is where they’re really getting their hands on the controls,” Stanley said. “The combination of head of the OCC and [Federal Reserve’s] vice chair for supervision, those are really the two crucial positions as far as risk controls at the ‘too big to fail’ banks. It’s seems like they put unusual pressure to push Curry out.”

The new acting Comptroller is Keith Noreika, a DC attorney, but he is not expected to become the permanent Comptroller.   Joseph Otting, a former executive who worked with Treasury Secretary Mnuchin at Onewest, is expected to be named as the nominee to become permanent Comptroller.

CIBC Blinks Again

We expect bigger Holiday gifts from our friends at PrivateBancorp, which has renegotiated its sale to CIBC for the second time!

Canadian Imperial Bank of Commerce CM -1.08% again sweetened its offer for PrivateBancorp Inc., PVTB +3.65% its latest attempt to win over the shareholders of the Chicago-based bank.

The new offer, announced Thursday, would give PrivateBancorp shareholders the same amount of stock, but it increases the amount of cash. It now values PrivateBancorp at $60.43 per share, or $4.9 billion overall, based on Wednesday’s closing price. It is the second time in five weeks that CIBC has increased its offer.

CIBC’s attempts to purchase PrivateBancorp have been fraught with turmoil, including a rise in U.S. bank stocks after the election that caused PrivateBancorp shareholders to protest the original offer as too low. More recently, CIBC’s own shares have declined along with the rest of Canadian banking stocks amid the fallout from a run on deposits at Canadian lender Home Capital Group Inc.

CIBC’s second offer, in March, was worth about $61 a share when it was first made. It was worth $57.43 by Wednesday’s close. CIBC’s initial offer, made more than 10 months ago, valued PrivateBancorp at $47 a share.

Thursday’s announcement was made by both banks. CIBC also said that PrivateBancorp shareholders will be eligible for the next CIBC dividend. PrivateBancorp shareholders will meet in Chicago next week to vote on whether to sell the bank to CIBC.

The deal is still subject to approval by PrivateBancorp’s shareholders, but one must think that they have a majority at this point.    The problem with stock-based transactions is the market reaction can make the deal less attractive for the seller, who still must sell the deal to its shareholders, thus giving the seller some powerful negotiation leverage.   According to Karl Ostby, Managing Director of Ambassador Financial Group, “When one company’s stock appreciates materially in relation to the other, it obviously makes the seller think twice.”

Auto Loan Problems Stress Used-Auto Prices

As credit problems emerge in auto loans, banks are pulling back from auto loans, while used auto prices are plummeting.   This is can be a negative feedback loop as reduced lending and delinquencies lead to excess supply of used cars, which leads to more losses and less lending.

Wells Fargo WFC +0.62% & Co., one of the largest U.S. auto lenders, last month reported a 29% fall in its auto loan originations for the first quarter from a year earlier. The decline, the biggest for the San Francisco-based bank in at least five years, was part of a common refrain in quarterly announcements from lenders including J.P. Morgan Chase & Co. , Ally Financial Inc. ALLY -0.53% and Santander Consumer USA Holdings Inc. SC +0.48%

Bankers’ caution is increasingly showing up in car sales, which Tuesday came in worse than expected for April. The declines are mostly occurring in lending to riskier borrowers, in particular those with low credit scores, where lending had ramped up for years.

“A very accommodating finance environment had been in place for some time,” said Bruce Clark, lead auto analyst and senior vice president at Moody’s Investors Service .“What you’re seeing right now is a pullback and the resulting pressure on unit vehicle sales.”

Some banks, including regionals Fifth Third Bancorp and Citizens Financial Group Inc., are beginning to retreat from higher-quality “prime” auto loans as new risks emerge. “It’s been an overheated sector,” said Fifth Third Chief Executive Greg Carmichael. “The auto business just isn’t as attractive right now.”

Recovery rates on liquidated car loans have dropped from 65% on 2011 loans to 51% on 2015 loans.     And, if used cars appear cheap, it is going to put pressure on new car sales.   For those of you have auto loans nearing the end of a lease, now is a good time to renegotiate your buy-out option!

Family Offices Go Solo

Family offices, which manage the financed and personal affairs for many of the wealthiest families in the world, are increasingly investing directly in real estate and companies, rather than investing indirectly through private equity firms.

About 81 percent of offices have at least one full-time employee sourcing and evaluating direct investments, according to an annual survey by the Family Office Exchange released Wednesday. Of the 118 offices polled, firms had an average of three employees involved in the investment process, two of whom had some responsibility for direct stakes.

Driving this push is the perceived lack of returns elsewhere, said Kristi Kuechler, president of the organization’s private-investor center. The average family office surveyed reported a 7.2 percent return last year and there’s less conviction that stocks, bonds and hedge funds will provide stellar returns. In fact, those surveyed reduced their allocation to hedge funds on average in 2016 and most don’t plan to increase it this year.

“The one place family offices think they can still generate double-digit returns is in operating businesses and real estate,” Kuechler said.

Direct investing in companies has become increasingly popular among wealthy families that see value in sidestepping private equity firms’ fees, which typically are 2 percent for annual management and 20 percent of profits. Going direct can also give families more say in investments and allow them to hold stakes longer than many funds permit.

Fees for private equity firms and hedge funds are under pressure on many fronts.   However, for the largest deals, it’s unlikely that family offices could do these deals themselves, so the large private equity firms will still get their share.   It will be harder though for them to compete on smaller transactions.

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