BANK MERGER MANIA : In Their Interest : Competitive Pressures Will Encourage More Bank Linkups
Who’s next? Will Wells Fargo combine with First Interstate? Will GlenFed buy CalFed? Will Bank of America acquire Bank of Boston or be acquired by NationsBank?
These are among the questions buzzing around the banking industry in the wake of Monday’s announcement that Chemical Banking Corp. will mate with Chase Manhattan Corp. to create the nation’s largest bank. The three giant California-based banking companies--Wells Fargo & Co., First Interstate Bancorp and BankAmerica Corp.--and a few thrifts are frequently named as possible merger candidates.
Only last year, Wells Fargo openly courted First Interstate and GlenFed made marriage overtures to CalFed, moves that were spurned in both cases. Will the objects of affection reconsider? Paul A. Mackey, banking analyst at Dean Witter Reynolds, thinks they may.
“If you put First Interstate and Wells together, there might be cost savings of 20% of the expenses of the combined entity,” Mackey said. “That’s something that could make some sense.” Mackey also thinks Bank of America may make a run at Bank of Boston, a New England institution known to be entertaining buyout offers.
Other possible acquisition targets may be Imperial Bank in Los Angeles, City National Bank in Beverly Hills, Westamerica Bancorp in San Rafael and French-owned Bank of the West in Walnut Creek, said Frank Terzuoli, senior manager and banking specialist at Andersen Consulting in San Francisco.
The names may change, but one thing is sure: Bank mergers overall will continue to accelerate as competitive pressures force banks and thrifts to become more efficient. What has changed in recent months is that generally higher bank share prices--the takeover currency favored by the acquiring institutions--are making the acquisitions more affordable.
The New York Stock Exchange financial stock index is up more than 27% this year, and the Nasdaq bank stock index is now up nearly 34%. In contrast, the Standard & Poor’s 500 index is up 22%. So it’s been another good year for banks.
“Bank stock prices are up and consolidation is easier in this industry when the currency values of acquirers are at high levels. Bank stock prices are up so much that it helps facilitate the transactions,” said Donaldson Lufkin & Jenrette bank analyst Thomas K. Brown.
More than $231 billion in U.S. bank and thrift assets had been involved in mergers and acquisitions this year as of Friday, up from $190 billion for all of 1994, according to SNL Securities of Charlottesville, Va. And those figures do not include the $11-billion Chase-Chemical deal.
Analysts say consolidation of the highly fragmented U.S. market has been long overdue. In addition to higher stock prices, mergers are speeding up because of recently passed laws that facilitate interstate mergers and because of a perception that there are simply too many banks.
Despite recent consolidation and failures, more than 10,000 banks--as many as 6,000 too many, by some estimates--are competing for a shrinking pie of deposits and loans, said Campbell K. Chaney, bank analyst with Rodman & Renshaw investment bankers in San Francisco.
Banks have lost loans and credit card customers to the likes of Foothill Corp., Mercury Finance and the finance arm of General Motors. Depositors, meanwhile, have fled in droves to money market funds operated by investment firms such as Merrill Lynch that offer better returns than traditional passbook savings and certificates of deposit, Chaney said.
Banks got a respite in the early 1990s when they made big profits from declining interest rates, which improved the earnings on their loans. Now that interest rates have stabilized, banks and thrifts must combine and cut costs to boost profits, analysts say. The Chemical-Chase merger, for example, is expected to allow the elimination of 12,000 jobs.
“Now the average banking company is looking at narrower margins and rising credit expenses,” said DLJ’s Brown. “They’re looking at difficult revenue environments in 1996 and beyond” and are thus more open to the idea of merging to boost profits, he said.
The mega-bank created by the merger of Chase and Chemical is unlikely to be duplicated in the marriage frenzy sweeping the U.S. banking industry. This, after all, is a proposed merger of equals, and few banks equal the asset size of either partner. But analysts expect banks and thrifts to continue to couple at a dizzying pace.
Bert Ely, an Alexandria, Va.-based banking consultant, expects Union Bank’s Japanese owners may put it on the block once its merger with Bank of California is complete. Ely also thinks American Savings in Irvine may be sold.
Chaney noted that First Nationwide Bank made an offer Monday to acquire San Francisco Federal for $250 million, the first acquisition of a publicly traded thrift “in a long time” that did not involve regulatory intervention. “It’s the first domino in a chain reaction that will go forward,” Chaney said.
Failures and mergers have reduced the population of available bank and thrift merger partners in California, said Mackey at Dean Witter Reynolds. And analysts do not expect to see banks buying thrifts, because S&Ls; don’t have a diverse enough service and customer base to fill the bill, Mackey said.
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Then There Was One
If chemical Banking Corp. and Chase Manhattan Corp. complete their$11-billion merger in early 1996, the new company, chase Manhattan Corp., would have one of the most storied histories of any U.S. financial institution.
CHEMICAL BANKING CORP.
* Industrial beginnings: Chemical began as the New York Chemical Manufacturing Co. in 1823, amending its charter a year later to include banking operations.
* What’s in a name? By 1844 all chemical business had stopped, but the bank’s name would never change. More than a century later, after acquiring New York’s significantly larger Corn Exchange Bank, and again in 1991, after merging with Manufacturer’s Hanover Corp., the bank spent thousands of dollars to convert every last sign to the Chemical name.
* End of an era: The Chemical name will finally be retired in 1996, at the completion of the Chemical-Chase-Manhattan merger.
CHASE MANHATTAN CORP.
* An American original: Founded in 1799 by Aaron Burr as Manhattan Co., the bank was originally started to run New York’s water supply and do banking on the side. The institution was the primary financier of the Erie Canal.
* Chase National: In 1877, John Thompson--a former schoolteacher and expert in currency values--founded Chase National Bank, named after Salmon P. Chase, a U.S. secretary of the Treasury who vigorously battled for national banking legislation during the 1860’s.
* A union: Chase National and Manhattan Co. merged in 1955, and five years later Chase Manhattan had offices in 17 countries.
Source: Wire reports
