Mergers Shake Up the Industry's Front Ranks
The order of the top 25 banking companies changed little in the second quarter, but pending mergers will bring dramatic differences by next year.
A pro forma listing that accounts for announced mergers and acquisitions would show six companies scooting up the list: Chemical Banking, NCNB (which will be renamed Nations-Bank), Banc One, Fleet/Norstar, Wachovia, and NBD. (See accompanying table at the lower right.)
This ranking emphasizes that the banking industry shakeout is at hand. And the rule for survival is to acquire, merge, or shrink.
Acquisitions Key to Growth
With only a few exceptions, the large bank holding companies that managed to increase assets in the past 12 months were those with the profits, capital, and stock market value to buy other institutions. The less profitable and more poorly capitalized companies were forced to seek merger partners or scale down operations.
All told, 14 of the 25 largest bank holding companies shrank in size during the year ended June 30. Citicorp remained the largest banking company, with assets of $217.3 billion, but that was down 4.6% from the year before.
Most of the 11 companies that grew did so at least in part through acquisitions. Bank-America Corp., the No. 2 company, with $113.2 billion in assets, expanded 8.9% during the 12 months, largely through purchases of failed thrifts from the federal government.
The combine-or-shrink trend is even more striking in the pro forma ranking. It shows that acquisitions and megamergers are bringing about the kind of wholesale reshuffling of the banking pecking order that pundits have predicted.
Destinies Out of Control
"Capital-strong institutions are forging ahead with the reshaping of the U.S. banking industry," said James J. McDermott Jr., president of Keefe, Bruyette & Woods Inc. "Those institutions that are not in as good shape lack the currency to control their own destinies."
The pro forma ranking highlights the growing muscle of a group of regional banks with rock-solid balance sheets and strong stocks, such as Banc One, Norwest, Wachovia, and NBD. These companies are growing dramatically through interstate acquisitions and are well positioned to take continued advantage of industry consolidation.
Also on the list of big acquirers is Fleet/Norstar, which emerged as a Northeast powerhouse despite red ink in 1990. Fleet bought Bank of New England's failed banks in Connecticut, Massachusetts, and Maine from the federal government in a well-publicized bidding war last winter.
Combining Weaknesses
The two most "mega" of the giant mergers in progress - Chemical Banking's combination with Manufacturers Hanover and NCNB's linkup with C&S/Sovran - exemplify the strategy of companies with their own problems seeking strength through partnership with organizations in similar condition.
These two deals will catapult the merged institutions to the No. 2 and 3 spots in banking's ranks.
The partners obviously hope that synergies and cost savings will give the combined institutions the earnings momentum and capital strength to compete with the strongest regionals.
A third group of companies includes those that are stagnating because of weak balance sheets and credit-quality problems. Among those that trimmed assets by 8% or more are Security Pacific, Bank of New York, First Chicago, Bank of Boston, and Mellon.
These companies must wonder whether industry consolidation will pass them by as they struggle to rebuild financial strength. Most of them figure prominently in merger speculation, and several may seek salvation through combination.
Otherwise, they must restore earnings to a point at which they can attract capital and take part in the industry shakeout on favorable terms.
The good news for banking's problem children is that they probably have some time to carry out their turnarounds.
"This consolidation is going to take place for a fairly long period of time," said Lawrence R. Vitale, analyst at Kemper Securities Group Inc., Chicago. "It won't be over by 1995."
