Saturday, March 24, 2007

To Start a Bank

If you want to start a Bank, read the recent article in Financial Times by Andrew Ward, who reports that
Almost 180 banks were opened in the US last year – the highest number since 2000 – with much of the capital provided by individuals rather than institutions.

De novo banks are flourishing in the US as a reaction against the consolidation that has halved the country’s number of banks in the past two decades.

.... But for such a safe investment, the returns can also be impressive. Between 2002 and 2005, banks with assets under $500m generated compounded annual return on investment of 22.6 per cent, compared with 8 per cent for the banking sector as a whole and 9.5 per cent for the S&P 500 index.

Such banks are better at lending to SMEs, Small and Medium-size Enterprises, who do not find equal service from larger banks. Larg bank loan officers, whose incentives seem to be connected to the size of their portfolios, may be less likely to attend to the needs of SMEs.

Georgia had the third largest number of bank start-ups in the US last year, behind California and Florida, with all three states gaining at least 20 new lenders.

We should be aware of the flip side of novo banks.

Chris Marinac, analyst at Fig Partners, an Atlanta-based banking consultancy, warns that competition is increasing among de novo banks at a time when the housing downturn and slowing economy are making lending riskier.

He also questions whether there are enough qualified executives and loan officers available to maintain high standards of management and risk control.

“A credit cycle has yet to truly test these new banks,” Marinac says. “As Warren Buffett says, it’s only when the tide goes out that you know who is swimming naked.”

Marinac believes most well-run de novo lenders will be successful in the long term but warns that their growing number is depressing the price potential acquirers are willing to pay.

The emphasis is mine.

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