The nation’s banks are changing names faster than Britney Spears switches costumes at one of her concerts.
More than 3,000 banks have merged in the past decade, involving a total of $3 trillion in assets. This massive consolidation has dramatic effect on bank customers, as well as holders of bank stocks.
Strange things can happen when you wake up one morning to find your bank was acquired. The new sign on the building is just one part of it.
For decades, U.S. banks had complained it was difficult to compete with much larger foreign banks, but times are changing and “economies of scale” is the battle cry. Expect bank mergers to accelerate.
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A powerful catalyst is the recent Bank of America announcement that it is paying $47 billion to buy FleetBoston Financial to create the nation’s biggest consumer bank. Many regional banks are being mentioned as potential takeovers in the wake of that deal.
My advice to customers of merged banks is to closely monitor all mailings from your institution for the first year so you don’t miss possible increases in fees or minimum requirements included in the small print.
Hold onto all your statements because switchovers often result in mixed-up data or errors as the acquiring bank’s operating systems go into effect. Be aware that some branches may be closed due to overlap in service of the two banks.
On the positive side, some merged banks do increase their hours and services. In addition, competing banks often offer attractive terms and products to lure the customers of a merged bank. The Federal Reserve says 1,300 new banks were opened in the eight-year period through last year, some in response to perceived declines in service resulting from bank mergers.
Bank stocks have been on the rise in 2003. That’s not only because of merger possibilities, but because the economy is reviving and profit margins are improving. The consumer banking business has been much stronger than corporate lending. Even if interest rates move higher, that should be offset by volume gains.
“Mergers tend to work out well for the sellers on day one, but a lot of deals have not been beneficial to the buyer’s shareholders,” noted Jason Goldberg, banking analyst with Lehman Brothers in New York.
Shares of acquirer Bank of America slipped after the announcement while FleetBoston stock rose, typical of such deals.
Among mid-capitalization banks, the stock of Charter One Financial Inc. (CF), TCF Financial Corp. (TCB) and North Fork Bancorp (NFB) are recommended by Goldberg. Wells Fargo & Co. (WFC), Wachovia Corp. (WB), US Bancorp (USB) and National City Corp. (NCC) are large regional banks he likes. Lehman doesn’t own the stocks, but does business with those banking companies.
Mark Morgan, banking analyst with Standard & Poor’s in New York, believes Bank of America stock could be volatile near term because more investors will be shifting in and out of it due to the merger. Playing the mergers game is extremely difficult, he cautioned.
“We don’t make stock recommendations for the purpose of making money on takeovers, but if you own bank stock, you want to be sure you own one that makes smart acquisitions or is attractive in its own right,” said Morgan, who currently recommends the shares of Citigroup Inc. (C).
Jackie Reeves, regional banking analyst with Ryan Beck & Co. in Livingston, N.J., notes that competitors in FleetBoston’s region have already begun trying to capitalize on the merger announcement as they seek to win new business or increase their current business with existing clients.
“The stocks of the mid-capitalization banks that I cover are up 25 percent this year,” added Reeves. “But I’d advise buying on sound fundamentals, not takeover speculation.”
Reeves’ current favorite regionals are Zions Bancorp (ZION) and Commerce Bancorp (CBH).
“In financial services we avoided the stocks of companies that do subprime lending, the brokers, the online brokers and the online lenders,” said Christopher Bingaman, portfolio manager for the Diamond Hill Bank & Financial Fund. “Our strategy has been to invest in domestic financial services companies, those being banks, thrifts, specialty financials and insurance companies.”
Bingaman’s top small-capitalization bank stocks are ITLA Capital Corp. (ITLA), First State Bancorp. (FSNM) and Corus Bankshares (CORS). Pacific Union Bank (PUBB), Merrill Lynch (MER) and Citigroup are his large financial services favorites.