Merger surge by yearend predicted: CS First Boston's Hanley sees a summer of opportunity.

Thomas H. Hanley, the veteran banking analyst, expects the pace of mergers to pick up significantly toward yearend.

He forecasts the "economics of consolidation" for both sellers and buyers will reach an optimum level between the fourth quarter this year and the middle of next year.

Meanwhile, the industry is probably in for a relatively quiet summer, which amounts to a buying opportunity for bank stock investors anxious to capitalize on the consolidation theme.

Mr. Hanley, a managing director of CS First Boston Corp., New York, is one of most senior observers of the industry on Wall Street. He is marking his 27th year as a bank stock analyst.

The analyst believes that the next few months may be the "last best chance" to acquire shares of several potential takeover targets, particularly smaller capitalization companies, at comparative bargain prices.

He thinks support is already firming up for bank equities, as demonstrated by the six-week rally in the stocks in May and early June.

"That rally was fueled by non-momentum buyers, the traditional buyers of banks, some of whom had gotten out of the stocks a year ago," Mr. HartIey said during a luncheon interview last week.

The banks have since fallen into a period of price weakness along with other stocks. The financial markets have been consumed by worries about future inflation, rising interest rates, and the weakness of the dollar in international exchange.

Mr. Hanley said he expects the markets to spend the balance of the summer searching for equilibrium amid shifting global economic conditions. By fall, however, the bottom should have been reached.

By then, bank earnings will be perceived by investors as strong despite rising rates, he said.

Emphasis on Profitability

The reason, he said, is an increased emphasis on profitability on the part of banks.

He pointed out that in May the banking industry quickly raised prime rates to 7.25% to match the Federal Reserve Board's increase in the discount and federal funds rates.

"In all my years of watching the banks, I can't remember a similar moment when the banks moved that fast," Mr. Hanley said.

In past rate cycles, a few banks might move quickly but others would lag, leading to a "split-prime" situation that could persist for a fairly long time.

Estimate of Gain in Earnings

The alacrity with which banks moved to preserve profitability was a major reason First Boston raised its estimate of the banking industry's overall gain in earnings to 15% from 13%.

Mr, Hanley said that growth may look attractive compared to the earnings growth for industrial companies as the year goes on, particularly if the nation's economy begins to slow down.

The analyst said the focus on profitability indicates bankers expect consolidation to accelerate.

Banks that are probable acquirers hope to raise their stock prices and enhance their currency for dealmaking, while banks who are likely sellers intend to lift their book value per share and enhance their takeout price.

Those efforts should bear maximum fruit between October and next summer, said Mr. Hanley.

That may coincide with the enactment of nationwide interstate banking if Congress finishes work on the legislation soon.

Congress must resolve questions about the interaction of state and federal laws, the treatment of foreign banks, the time frame for a state to withdraw,and the state deposit market rate caps. Given the absence of partisanship so far, however, Mr. Hanley said none of these issues should prove insurmountable.

Mr. Hanley sees some other signs of a coming pickup in the pace of mergers.

In particular, he notes a continuing dialogue among banks about mergers and even pools of funds set up by some banks to benefit from mergers. Banks, for themselves and customers, .are among the largest buyers of bank stocks.

Mr. Hanley singled out some smaller cap companies as investment opportunities:

Recently he raised his 12-month projected takeout price to $40 per share from $32 for Leader Financial Corp., Memphis, which is Tennessee's largest savings institution.

Leader's stock closed Monday at $25.375 while Roosevelt's ended at $16.75 per share.

Roosevelt Financial Group Inc., St. Louis, he noted, is selling at only 7.2 times his 1995 earnings estimate. The thrift's probable 12-month takeout price is $27 per share.

He called Columbia First Bank, Arlington, Va., also a thrift, "the purest takeout in the Southeast." His 12-month takeout price is $54 per share, while the price on Monday was $41.

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