Banks have increasingly brought wealth management companies under their tents to increase noninterest revenue streams as loan growth has remained anemic and interest rates low. First Republic's pending acquisition of Constellation Wealth Advisors added to a slew of such deals in the past few years. By conventional measures, Constellation offered a high-value target, said Steven Levitt, managing director of Park Sutton Advisors LLC. “In general, banks are very interested in wealth management acquisitions these days because of the synergy with their business and (the) ability to achieve a pop in P/E the more fee income they have,” Levitt told SNL.
First Republic itself purchased Luminous Capital Holdings in December 2012 as part of the trend. Silver Lane Advisors, which advised on both the Constellation and Luminous deals, noted the trend in its 2015 M&A outlook. Silver Lane said banks have struggled to benefit from the economic recovery. Aside from the low interest rates and lack of loan growth, the traditional banking model has been burdened by regulatory pressures on fees, capital requirements and compliance costs, it noted.
Wealth management firms are an attractive investment for banks needing to replace banks' typical revenue sources because they are capital efficient, can leverage banks’ physical infrastructure and regional brand, and can achieve earnings that are stable and insensitive to interest rates, Silver Lane said. “Relative to core bank offerings, the profitability of wealth management is attractive — with strong underlying fundamentals in large, underserved markets where banks have pre-existing customer relationships,” Silver Lane said in the report. Further, acquiring wealth management firms does not come with the regulatory burdens associated with bank-to-bank M&A, Silver Lane's Jeff Brand told SNL. “A bank deal, no matter how big or small, it seems like the regulatory process is drawn out,” Brand said. Silver Lane said in the report that banks that do not manage wealth management units properly can allow them to turn into dead weight on their portfolios if they do not invest enough to grow them or sell them at a certain point of the business’ maturity.
First Republic’s wealth management acquisitions have been for two of the largest companies bought out in the last three years as measured by assets under management, according to SNL data. Some observers thought the $115 million price tag for Constellation a bit high. Asked if the deal signifies an escalation in market value for wealth management companies, Levitt pointed instead to the seller’s singular value. “Constellation is a high-quality firm, and First Republic buying them is logical given the Luminous purchase on the West Coast and their likely desire to build out further in New York,” he said. The near future will likely bring more bank acquisitions of wealth management firms, Brand said, adding that Silver Lane is advising on one in the works.
The Federal Reserve has given no indication that economic growth could prompt an interest rate hike in the near future. Even if a hike came, it would not necessarily be a help to banks’ business, especially without better loan demand or if regulatory burdens persist. Wealth management companies will continue to lure acquisitive banks, Brand said. “They view wealth management as a particularly attractive segment in today’s environment,” he said.