MINNEAPOLIS -- It's easy to understand why Steven Schroll, the bank analyst at Piper, Jaffray & Co., is upbeat.
Most of the 25-plus Midwest and Northwest banks that Mr. Schroll follows are at least healthy, and quite a few are in the high-performance category.
What's more, three institutions in his home market Norwest Corp., First Bank System Inc., and TCF Financial Corp. provide him with striking examples of the potential benefits of consolidation.
"The industry is moving toward a more oligopolistic form," he said in a recent interview. "It's being driven by consolidation, the need for size and scale.
"Oligopolies are a wonderful form of business for banks," he said. "You can control your deposit prices and leverage your market share."
Norwest, First Bank, and TCF jointly control about 75% of the deposit share in the Twin Cities. But each has its own niche. Separate Niches Norwest is a consumer bank focusing on the middle market and up. First Bank is a general consumer and business bank. TCF targets the middle market and below.
"They all have their own niches, and they are profitable," he said. "They are three of the best at what they do."
Mr. Schrolk 37, joined Piper Jaffray in May 1988 after spending three years at First Bank System.
He got his start as an equity analyst at Piper's rival, Dain Bosworth Inc., after earning his MBA at the University of Minnesota.
Out-of-Town Picks
After more than a decade in the Twin Cities, Mr. Schroll admits a hometown bias in naming his favorites. But he also likes a number of community banks outside the local market.
And his picks include the likes of Boise, Idaho-based West One Bancorp, which he calls a wellrun four-state franchise that has takeover prospects.
He is less than bullish on others in the Pacific Northwest, such as Portland-based U.S. Bancorp and Washington Mutual Savings Bank, the largest independents in their respective states.
He is unimpressed by U.S. Bancorp's plan to slash expenses from 66%.
"They say they want to get to 59% [efficiency ratio] in three years. God help them if they can't," Mr. Schroll said. "They have half their assets in the lead bank alone, so I would think that two years would be a better goal."
Mr. Schroll said that Washington Mutual, despite its dominant market share, could be open to a preemptive hostile takeover because of its depressed stock price.
Margins Squeezed
In March, the $15.8 billion-asset Seattle thrift surprised analysts with news that 1994 earnings would fall short because rising interest rates have severely compressed net interest margins. Recently, the thrift's stock has been driven to about 116% of book value.
"They've been put in the penalty box for the short term," Mr. Schroll said. "Somebody could make a preemptive bid for them and pay stockholders about a 50% premium over the current market and still buy them for about 10 times [ 1994] earnings."
Generally, though, Mr. Schroll's outlook is bullish. He cites the industry's strong balance sheet, positive earnings outlook, potential for "superior" dividend growth, and consolidation.
Mr. Schroll predicted trading multiples could rise to 12 to 13 times earnings - and even higher for the strongest banks - from 10 to 11 times earnings today.
"The consistent profitability of the industry will eventually be recognized by the Street," Mr. Schroll said. "The 1990s will be better for banks because the irrational competition of the 1980s is gone."
Even if the bank sector does not improve, Mr. Schroll predicted that Norwest's multiple will climb to at least 13.
"They've had record earnings with no end in sight with a return on equity in the 18% to 20% range, they have strong capital, and they're diversified," he said.
The company predicts double-digit growth in profitability, has had robust loan growth, and is focusing on cutting one of the industry's highest big bank efficiency ratios. It is also quickly expanding a profitable finance company business.
First Bank System, his former employer, has become a leader in using cost-saving technology, Mr. Scroll said. The bank is focused on profitable fee income niches nationally, notably the transaction card business.
With banking hubs at home and in Denver, First Bank has started to build a presence in the heavily fragmented Chicago market with the purchase of Boulevard Bancorp. "The real question is whether they can do it in Chicago at a price that is beneficial to shareholders," he said. 'Common Man's Bank' TCF is among his favorite smaller companies. The $5 billion-asset thrift has made its mark as a major retail operator in the shadow of Minneapolis giants. Its stock price has risen sixfold since he recommended it three years ago.
"It's one of the classic turnaround stories in the thrift industry," he said. "With some smart moves and luck they have been successful. Their strategy is to be more of a common man's bank, a mini-Norwest."
Best known for its Cub Foodstores branches in the Twin Cities, the aggressive retail bank has begun to develop a presence in Milwaukee, Chicago, and Detroit - where many of the bank's executives started at Michigan National Corp.
He also favors Community First Bankshares. The Fargo, N.D.-based thrift acquires 90% to 95% stakes in small healthy banks, effectively buying into them for an arguably bargain price of 1.2 times book value.
"In about 80% of their markets they are the only bank," he said. By stopping short of a complete buyout, Mr. Scholl added, Community First, which has operations in Minnesota, Doth Dakota, Colorado, and Wisconsin, gives local managers more of a stake in the acquired bank's performance.
Another Schroll pick is Houston-based Charter Bancshares, a $700 million-asset bank that offers everything from retail banking to an international division. The company is 42% owned by NationsBank Corp., which Mr. Schroll expects to spin off its holdings.
