The mid-range banks appear to be in an interesting predicament. After the major financial crisis of 2008, major banks like JPMorgan Chase, Citigroup and Bank of America grew even bigger and more powerful. After the Lehman crisis, regulators were increasingly against many deals that involve these behemoths. These banks have pressure on them to disperse their power and become less complicated and interwoven.
This hasn’t stopped the banks below them from growing larger and making bigger deals. At times this can be the only way for these middle ground banks to remain profitable and progress. Some smaller activists investors and firms have begun to realize this and get in on the action.
One of the more notable small bank activist investors is PL Capital Advisors, based in New Jersey. As it’s been growing its fund, PL has been setting its sights on other mid-range banks.
David Einhorn's Greenlight Capital funds were up 11.9% for 2021, compared to the S&P 500's 28.7% return. Since its inception in May 1996, Greenlight has returned 1,882.6% cumulatively and 12.3% net on an annualized basis. Q4 2021 hedge fund letters, conferences and more The fund was up 18.6% for the fourth quarter, with almost all Read More
Other Activists are also ramping up their efforts – including Basswood Capital Management, Stillwell Value and Seidman & Associates.
There are some challenges given the Bank Holding Company Act, which states that no investor can acquire more than a 10% stake in a bank without actually becoming a bank as well. These regulations have changed how firms and hedge funds do business. Activists are left acquiring small stakes instead of large concentrated ones that would give them more voting rights.
Instead of waging a public war and proxy battles they take a more subtle approach by talking and communicating with management directly. They have to gain favor with managers if they want to get anything done. Mid-size banks have become targets after years of subpar growth and regulations that make companies rely on cost cutting to boost margins as opposed to increasing revenues.
The solution to this is to do like the major banks and begin merging. “Banks need to stop kidding themselves that higher interest rates are going to save them” — SNL Financial
Some recent activist campaigns include Astoria Financial, targeted by Basswood, which acquired a stake of 9.2% in the company. Basswood claimed that there was a substantial opportunity to give shareholders more value. Astoria won’t be the last example of activist investors capitalizing on mid-range banks.