Banking Keeps Changing: BankUnited and China's ICBC

There were two pieces of banking news last week that seemed to fall below the radar screen due to the visit of China’s President Hu Jintao and the events in Tunisia and Egypt. These two pieces of news had to do with BankUnited, a Florida bank that was “saved” by a group of buyout firms, and with ICBC, the world’s biggest bank by value which happens to be a Chinese bank, who announced that it was buying an American bank.

Bank United sold 29 million shares of stock at an initial public offering on Thursday evening for $27 per share. This put the value of the bank around $2.6 billion.

To me the important thing about BankUnited is the owners of the bank which include Wilbur L. Ross, Jr., the Blackstone Group, the Carlyle Group and Centerbridge Partners. BankUnited was Florida’s biggest bank when it failed in May 2009. The unique ownership of the bank came about when the FDIC sold the bank to this group of “private” investors.

The FDIC was “desperate” to attract capital and private-equity firms were where the money was. So the FDIC cut a deal with this group to “unload” BankUnited. This was a first because private-equity had never shown much interest in owning commercial banks…the returns were just not that great given the risks. And, the regulators never cared much for this kind of money…private-equity firms were only interested in a “quick” buck.

The deal for BankUnited was “rich” because the FDIC needed to unload the property. But, once one deal was cut, more followed, but they were not necessarily as “rich” as the first one. Now private-equity firms have acquired more than 50 banks.

The IPO on Thursday produced a lot of money for the owners. The owners are expected to take away more than $500 million from the offering and they still will maintain an ownership in the company of about 70%, more than $1.8 billion. The buyers put up $945 million to complete the deal with the FDIC.

The stock price rose almost 5% on Friday.

BankUnited is now highly capitalized, very profitable, is growing deposits, and also is making loans. And, management is now looking to buy other banks.

Commercial banking meets “Shadow” banking. But, this wasn’t the way it was supposed to be. Banks were supposed to get smaller because there was too much systemic risk when banks were too big to fail. Also, we had to go back to the “good ole days when banks were banks and other financial institutions were “other” financial institutions. But now we have private-equity firms owning more than 50 banks!

It seems like everything that the Obama administration and the regulators wanted has just been the opposite of what they have actually done.

In the decline in the number of banks which now exist, about 7,700, to less than 4,000 over the next several years, banks are going to continue to get bigger and the boundary between financial institutions and money sources are going to get more and more blurred.

Why? Well, for one, it pays, and it pays well. Second, there are just too many banks that need financial help and the Federal Reserve and the FDIC are going to do everything in their power (and maybe more) to make sure the weaker institutions are absorbed or consolidated into other organizations in as orderly a fashion as possible.

The second piece of news has to do with another foreign bank acquiring an American bank. This time, however, the foreign acquirer is Chinese: ICBC will acquire 80% of the Bank of East Asia’s retail branch system in New York and California. This acquisition must still be approved by United States regulators. If this deal is approved it will be the first time that a mainland bank in China would be operating under the regulatory framework of the United States. Up-to-now, American regulators have not approved the soundness of the Chinese banking system because it is government controlled and politically directed.

Although some wholesale business has been allowed in the past for Chinese banks, approval of this transaction would be entirely different because it would mean that the deposits of this bank would now be insured by the FDIC. Thus, the Chinese banks will not only have to open their books to the regulators, but it would also expose the Chinese regulators to scrutiny.

This acquisition will not alter the American banking landscape much in the near future. The bank was already foreign owned, it was Hong-Kong based, and it already had strong ties to China. The bank is only about $700 million in asset size and most of the bank’s business is with Chinese businesses.

However, the crucial thing will be that the Chinese will own a bank in the United States. How big it is at first and how much business it does with Americans at first is not the important thing. I go back to the advice given me some years ago: the Chinese think in terms of decades while people in the United States think in terms of years. The Chinese will own a bank in the United States!

Thus, the ground continues to change. The American banking system is going to become more and more global with the presence of foreign banks taking on a bigger and bigger role within the country. And China, and Russia, and Brazil, and India, and Canada, and others will be included. As I have stated before, I believe that the branches of foreign banks and the largest twenty five domestically chartered banks in the United States will hold more than 80% of the banking assets in the United States. There is just going to less and less need and less and less room for smaller domestically chartered banks to exist.

It is just not realistic to believe that the banking system of the next five years is going to look anything like the banking system that existed before the recent financial collapse. The owners of banks will also be different and will include governments and private-equity firms and individuals and others. We are only kidding ourselves if we think that we are going to return to anything like that. Cries of support for Main Street are just the wishful thinking of those that would like to return to the past. The world moves on.

Rather than trying to retain the past we need to ask what will be needed in the future. Parts of the American landscape are fading. One part of that landscape is the small, locally owned bank that serves just the community it resides in. My grandfather ran a small bank in a small town in the Midwest. He hated the large banks in the nearby big city and wanted to keep them out of his territory. He argued that large banks just “sucked deposits” out of a local community and only made loans to large businesses within the big city. As a consequence, the local community suffered. The small, vibrant, self-sufficient and morally-driven local community has always been a part of the American dream.

This, for better or worse, is not the future. In fact, to some, it was not the past, but that’s
another story.

The Great Recession has changed things. Let’s prepare for the future, not hope for the past.