Small-Bank Consolidation Wave Coming
Morgan Keegan asserts that banks are trading at significant premiums to their Capital Assistance Program (CAP) conversion prices, based on the KBW Bank index. These "cap premium" stocks bear downside risk – if the banks cannot raise private capital as expected, they will have to drop valuations to CAP prices.
Predicting that larger regional banks will absorb small-cap banks, Morgan Keegan suggests that investors buy consolidators on the pullback from a capital announcement, as low-cost acquisitions funding long-term growth offset near-term dilution. The investment firm favors banks with strong capital and aggressive credit management, such as First Horizon National (FHN) and Texas Capital BancShares (TCBI).
Source: Barrons.com | May 4, 2009