Hitting the Banking Sweet Spot?

3 Aug

I sure hope I was wrong. Could an unmitigated calamity really morph into the best of all worlds? If I could set aside my prejudicial cynicism, maybe I could see that the answer is yes. And yet . . .

In May I discussed a number of bad options for HSBC’s sale of their retail banking network in Upstate New York. Option one, which I offered as the most negative, was a division of the 195 branches among local players and the elimination of the backoffice, support and leadership functions in the main HSBC tower and associated atrium. Option two, the preferred option to me, was for a banking giant new to Buffalo to sweep in and buy the lot, necessitating the establishment of a regional headquarters and the support jobs that go with it. My hoped for suitor was Toronto Dominion (TD), as it would both connect their US East Coast network with the home base in Toronto, and continue the local strategy of encouraging Canadian business investment in Buffalo. Such a local footprint, by TD or other new player, would be smaller than HSBC’s currently but preferable to piecemeal dissolution. As a side benefit, it would also remove a potential suitor from swallowing the acquisition-ready First Niagara.

The comments from that May article, from several local banking types, former and current HSBC employees, and knowledgeable laymen, ranged from optimism that HSBC would retail its global banking operations in Buffalo (despite the sale of the retail network) to vented frustration that much of HSBC’s leased space is empty already, and its just a matter of time before Buffalo’s jobs are in Chicago or New York.

It was not that long ago that Buffalo was near the center of the banking universe, albeit briefly, as HSBC, M&T and First Niagara all made international financial news simultaneously. Both of my options indicated that run was at a quick end.

Flash forward to Sunday’s headline news that seemed to present a Goldilocks Option Three that I did not consider. First Niagara will buy HSBC’s retail bank network in upstate New York and Connecticut and retain “most” jobs. HSBC Holdings will cut 30,000 internationally but none locally. The 3400-ish workers in the HSBC tower and atrium will continue to support worldwide finance for an international banking power. Control and profits of 195 retail branches will shift to local good news story First Niagara. Jobs will be retained. In fact, the situation is arguably better than the status quo, as a local company grows and becomes more difficult to acquire. The politicians gushed at the news.

Governor Cuomo:

Given the possible losses from the HSBC divestment in New York, this is the best possible outcome for HSBC’s employees and branches across the state. In addition, this purchase is good news for New York, because First Niagara is a New York company that has a record of growth and creating jobs in upstate New York and with this deal it is showing that it is poised to continue and expand this important commitment to our state and our work force.

County Executive Collins:

I don’t want to put words in his mouth, but what he [First Niagara CEO Koelmel] said to me is we don’t need to worry about those jobs in the branches. From my perspective, it’s as good as it can be for Western New York with a locally owned bank acquiring those branches.

Everything worked out as good as it possible can, right? It’s not too good to be true, is it?

Hang on a minute.

It did not take long for fine print to be read, logic to take over, and reality to set in. There was no way First Niagara could keep the entire HSBC branch network. Regulators would snatch off pieces for anti-trust reasons, and simple logistics and geography would force the closing of more. On Grand Island, HSBC and First Niagara are nearly across the street from one another; on Transit Road they share a parking lot. Such a scene will be played out across WNY. So, out of those 195 branches bought, how many will First Niagara actually keep?

“Half” is the answer we got Tuesday. In fact, First Niagara may resell more branches than it keeps. Suddenly Goldilocks Option Three looks a lot more like my Option One. Evans, Warsaw, and other smaller banks will each get their chance after all. If the branch jobs are going to be retained, it won’t be by First Niagara. Such platitudes turned out to be a wish, not a plan.

What are we left with? HSBC stays in its tower, but more tenuously – it now has no more tie to the area than GEICO and Citi. First Niagara has grown but pledged to stay in Larkinville. Such a move is good for restoration and revitalization efforts, but perhaps it also indicates how much they plan to grow at the uppermost level – there is limited space in those relatively full offices, even after the U Building is restored and occupied. First Niagara’s growth may reduce the chance of outside acquisition; the number of banks that can afford them has shrunk. At the same time, they may now be large enough to appear on the radar of the biggest threats. The financial markets are not impressed with First Niagara’s plan to dilute share values further (to be fair, the markets aren’t happy with anything now during the debt ceiling mess). If the share price drops, First Niagara may look more tempting to take over, not less.

5 Responses to “Hitting the Banking Sweet Spot?”

  1. mark August 3, 2011 at 10:45 am #

    I could see HSBC selling off the mortgage unit in Depew, vacating the tower and consolidating most of that workforce into the atrium which is apparently being renovated to accommodate up to 2,000 employees.

    I doubt First Niagara would ever occupy One HSBC Center. When a bank is ready for it’s own skyscraper they want to have something that defines them, their era, and their own success so a late modernist, already established local icon makes them seem like they’re just taking the unwanted leftovers of a bigger bank’s lengthier legacy. It would also be great for downtown to have a legitimate addition to the skyline from our generation to tell ourselves we’re not in a time capsule.

    It will be interesting to see how the local landscape evolves in reference to the soon-to-be abandoned HSBC branches and what they get converted into.

  2. Pauldub August 3, 2011 at 1:12 pm #

    A little turn about is fair play on the Island. The current First Niagara facility used to house Anchor Savings Bank, which closed when it was bought out by HSBC. Think they’ll shutter HSBC or move First Niagara into that building? Not like that plaza does a booming business in the first place.

  3. KevinP August 4, 2011 at 12:37 am #

    Good start Brian.  What we’re missing here is the perspective on what FNFG is doing long-term.

    They made an idiotic deal by buying 195 branches, at a 7% premium, knowing they are going to close half of them.  They will then own 90-some branches at the price they paid for 195. Crazy.  It’s a dilution of shareholder value and Wall Street reacted appropriately by selling FNFG like crazy.

    As a stockholder I am pissed.

    But I may make that up when they sell.  The goal is clearly to grow quickly…very quickly…in order to get bought out.  Koelmel is being hailed as a hero today but the end game is to cash in and leave Buffalo behind, just as Andy Dorn did at Greater Buffalo Savings Bank a couple years ago.  Get all of Buffalo behind your “local” efforts, blame the Board of Directors for accepting the sale, and cash out with a ton of money.  Remember when we all believed in GBSB and moved our accounts there because they “cared about Buffalo”?  Same thing is coming with FNFG.

    • Christopher Smith August 4, 2011 at 10:08 am #

      @Kevin, it is clear that they are priming themselves as an acquisition target, but they have just about priced themselves out of the ballgame as a regional retail outfit. Not too many buyers out there for a bloated local right now…

  4. Brian Castner August 4, 2011 at 7:42 am #

    @ Kevin – I’ve written more on the FNFG trajectory before, and as a shareholder I agree with your sentiment.

    But I disagree a little with your analysis. I think it’s more likely Koelmel finds himself out of a job than cashing out. FNFG has brought in outside industry leaders recently for key positions as they grow. I think there is tremendous Wall St pressure to get the stock price up. This acquisition is a step back from that task, but the previous buys are starting to pay off in profits. The threat that FNFG is now big enough to be bought by the bigger fish is the real local risk to me, but I think it will happen (if it does) because they left themselves vulnerable with a low price than because of an engineered plan by Koelmel himself.

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