Merger activity is expected to pick up again at the turn of the year, and three banks whose stock prices have risen strongly in recent weeks look like attractive takeover candidates, according to a Duff & Phelps analyst.
Claire M. Percarpio, group vice president at the Chicago-based firm, said First Interstate Bancorp, Crestar Financial Corp., and U.S. Bancorp all have significant upside potential in their share prices, even after a strong performance by all three stocks in December.
Based on Tuesday's closing prices, First Interstate has gained 11% in the past month, followed by Crestar, up 9%, and U.S. Bancorp, up 7%. The American Banker index of 225 bank stocks was 4.77% in the past month.
In late afternoon trading Wednesday, Los Angeles-based First Interstate was $64.50, down 62.5 cents; Crestar, which operates in the Richmond, Va.-Washington, D.C., corridor, was up 50 cents to $43.125; and U.S. Bancorp, which is based in Portland, Ore., but has operations in Washington, Idaho, Nevada, northern California, and Canada, was at $25.125, down 37.5 cents.
Mergers Seen Picking Up
"Takeovers of larger banks have been relatively quiet of late but we think acquisition activity will pick up again in the new year as banks line up to pick their partners before pickin' gets slim," Ms. Percarpio said.
She pointed to the fact that Keycorp and Society Corp. had recently joined hands with the goal of building a national franchise across the upper half of the United States.
"We see other possible large regional combinations in the wind as management teams struggle to define their strategies," she said.
Ms. Percarpio said that despite the likelihood of broad consolidation in the banking industry, the larger takeover candidates did not, for the most part, have much of a takeover premium embedded in their stock prices.
In the case of First Interstate, Crestar, and U.S. Bancorp, they still trade well below the prices they would command if they were acquired.
All three trade at 150% to 160% of book value and nine to 10 times earnings expectations. But each franchise, if sold, would command more than two times book value and perhaps 15 or better times trailing earnings, Ms. Percarpio said.
The Duff & Phelps analyst said that First Interstate was particularly attractive, given its presence in five states west of the Rockies - California, Arizona, Oregon, Washington, and Nevada - plus the large, carved-up Texas market.
"The bank has recovered strongly from a long period of financial difficulty and already has worked through much of its credit problems," she said.
While First Interstate has turned itself around to the point of management being in the position to call its own shots, Ms. Percarpio believes there are clearly a number of buyers wanting to enter its markets and that there are franchises of size to choose from.
"Wells Fargo is clearly among the possible buyers but does not seem likely to take a run at them until its own stock price has strengthened and real estate concerns have abated," she explained.
"Crestar is of a more digestible size than First Interstate, at about a quarter the size and also offers a leading market share in a market where there are few, if any, franchises left of size for those waiting to enter," she said.
Ms. Percarpio believes U.S. Bancorp also would be easier to swallow up. "It has less than half the assets of First Interstate but nearly double that of Crestar."
