Bank M&A Heats Up Amid Subprime Fallout

Bank M&A Heats Up Amid Subprime Fallout

Regional Banks Seen Striking M&A Deals After Mortgage Losses Strain Balance Sheets


NEW YORK (AP) -- The bank branch on the corner might be changing names -- again.
Get set for the next wave of consolidation that could sweep through the nation's banking industry this year. Chief executives at some of the top regional players might be mulling deals to salvage businesses pummeled by the subprime mortgage market's collapse.


Banks like the West Coast's Washington Mutual Corp., the Midwest's National City Corp., and the Southeast's SunTrust Corp. are among those considered takeover targets because of depressed stock prices and credit uncertainties. Larger financial institutions might use this weakness to expand geographically and gobble up deposits along the way.

It is quite simply survival of the fittest -- more banks are potentially up for sale now than in the past 10 years, according to analysts. But, it might take until the latter part of 2008 before stronger banks begin to take over those that are weaker.

"There's a lot of sellers out there, and the burst of deals will occur once the credit picture is more stable," said Tom Michaud, president of the securities firm Keefe, Bruyette & Woods Inc. "You'll see more consolidation in the back end of the year, and it will be the ones that are weak and in need of a partner."

Until then, Michaud and others believe any deals will be in the form of rescues -- with Bank of America Corp.'s $4 billion acquisition of troubled mortgage lender Countrywide Financial Corp. just the start.

That transaction might embolden other CEOs to strike now before someone else beats them to a lucrative deal.

There has been speculation that JPMorgan Chase & Co., the nation's third-biggest bank, is in talks with WaMu about a possible combination. The Seattle-based thrift's stock price has been slammed because of mortgage-related writedowns, and an acquisition would hand JPMorgan a much needed presence along the West Coast.

Spokesmen for both JPMorgan and WaMu declined to comment.

Bart Narter, a senior analyst with business consultant Celent LLC, said banks that don't have mortgage problems are better equipped to absorb rivals. And they would immediately benefit by an influx of new customers and branches.

"There are lots of banks that didn't play the mortgage game and aren't in trouble," he said. "Those banks with mortgage problems are seeing a decline in stock prices that are making the whole company a bargain, and that makes them very attractive."

The only thing that might stand in the way, he said, are regulatory problems such as antitrust issues. But, that might be overlooked by the government in an attempt to help the financial system work through the mortgage crisis.

For instance, BofA will likely sidestep a rule that prohibits any single bank from holding more than 10 percent of the nation's total deposits. Regulators could have potentially pressed this issue, but analysts believe they will relent to avoid a bankruptcy at Countrywide that would damage the home-loan market.

While retail banks have become takeover targets, their counterparts on Wall Street are taking a different approach. Merrill Lynch & Co., Citigroup Inc., Morgan Stanley and others are using massive investments from foreign governments to shore up their balance sheets.

Before, they might have been forced into a sale after posting massive mortgage-related writedowns. Now, sovereign funds -- investment arms of foreign governments -- are throwing them a fiscal life preserver.

These funds have invested more than $27 billion for big stakes in Wall Street investment houses, and more could be unveiled in the coming week when both Citi, which owns the Smith Barney brokerage, and Merrill report fourth-quarter results. But that might not necessarily be good for shareholders who would benefit from lucrative takeover offers.

"These investments dilute shares and make them less valuable," Michaud said. "That makes it difficult for these stocks to ever see 52-week highs in a reasonable amount of time."

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