Bid for a California Banking Giant : INVESTORS : Capitalizing on Merger Mania
Technology stocks have stolen the limelight on Wall Street this year, but in the shadows many bank stock investors have made small fortunes--thanks in part to merger mania.
Many major bank shares have surged 50% or more since Jan. 1, and most of the stocks added to their gains Wednesday after Wells Fargo & Co. made a surprise stock-swap offer for rival First Interstate Bancorp.
Although bank mergers have been happening with increasing frequency since 1990, the pace picked up this year with some mega-deals that have focused investors on bank stocks’ appeal.
Given the backdrop of strong loan demand, falling deposit interest rates and a cut in federal deposit insurance fees, bank earnings are on track to rise 10% to 20% this year overall.
“This is bank heaven,” said Christopher Davis, manager of the Davis Financial Value stock mutual fund in New York.
But the surge in takeover activity has clearly added a speculative tone to the market for bank stocks in recent months, as investors bid up shares of potential buyout targets and potential acquirers--as occurred Wednesday with Wells and First Interstate.
The growing frenzy for the stocks has caused some veteran bank investors to pare their holdings. The Vanguard Windsor stock fund, for example, had 22% of its assets in bank stocks at the start of the year, but has cut that to 16% now, said co-manager Charles Freeman.
Some of the stocks “have gotten into our selling zone,” Freeman said. “The easy money has been made.”
Indeed, bank stocks have been excellent performers for most of the past five years. The Fidelity Regional Banks stock fund, for example, rocketed 351% in the five years ended Sept. 30, compared to a 129% rise for the average general U.S. stock fund.
At the start of this year many bank stocks were priced at just slightly above their “book” value per share, or the theoretical value of the business. Now the stocks are typically twice book value or more, a high level for banks historically.
Likewise, although the stocks’ prices relative to estimated 1996 earnings per share appear low compared to the average price-to-earnings (P-E) ratio of about 16 for U.S. blue-chip stocks, the highly cyclical nature of the banking business makes some investors leery of paying more.
If interest rates should jump next year, or if the economy should begin to weaken--causing banks’ problem loans to rise from current low levels--earnings could slump.
Beyond the cyclical risk, even the banking industry’s biggest fans concede that it is basically a low-profit-margin, low-growth business that is under attack by brokerages, insurance companies, mutual funds and other competitors.
“Banks are being surrounded,” said Davis. “They have to be the best in the business to survive.”
For that reason, he thinks the game of trying to pick takeover targets is too risky. “We’ve been consolidating our holdings, focusing on the banks we really like” as survivors, Davis said.
His favorites include Banc One, First Bank System, Citicorp and Wells Fargo. Like many Wells shareholders, Davis believes that the company’s management is superb, and justifies the stock’s high price-to-book value.
He also believes that a Wells-First Interstate marriage makes sense, and that Wells’ track record as a “proven cost-cutter” will assure a decent payoff for the $10.9-billion price offered.
“My feeling is that if Wells offers you a good price, it’s in the best interest of shareholders [for First Interstate’s management] to go with it,” Davis said.
Michael Stead, whose SIFE Trust stock mutual fund in Walnut Creek, Calif., also invests exclusively in financial-industry shares, said he is holding onto his First Interstate shares on the expectation that Wells could raise its bid.
“I think there’s potential for Wells to go as high as $150 a share,” Stead said. At Wednesday’s share prices, the bid was valued at about $143 a share.
But Stead, who also owns Wells in his fund, concedes that the continuing surge in bank stocks is causing him to trim his holdings.
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How The Stocks Have Run
Bank shares have rocketed this year as interest rates have dropped, and many of the stocks now are priced at nearly two or more times “book” value, the theoretical value of the business. But because the stocks’ price-to-earnings (P-E) ratios are relatively low, many investors still view the shares as bargains.
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Wed. price 1995 Price to P-E on Bank and change Gain book value ’96 est. Wells Fargo $229.00, +15.38 +58% 3.2 11* First Interstate 140.25, +34.25 +107% 3.0 12 First Bank System 51.63, -0.38 +55% 2.5 11 BancOne 38.00, unch. +50% 2.0 11 Bank of Boston 49.38, +1.50 +91% 1.9 10 Barnett Banks 60.13, +1.75 +56% 1.9 11 Citicorp 69.13, -3.63 +67% 1.9 9 NationsBank 72.63, +0.75 +61% 1.7 9 First Chicago 71.75, +0.13 +50% 1.5 9 BankAmerica 63.50, +0.25 +28% 1.4 9
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* based on earnings expected before merger bid was announced
All stocks trade on NYSE.
Source: DLJ Securities
