Banks' eagerness for revenue and earnings growth is likely to result in more deals like the one Banc One Corp. struck this week to acquire First USA Inc.
"The single, biggest issue facing regional banks is the lack of organic revenue growth," said James McCormick, president of First Manhattan Consulting Group.
The prescription, he and many other industry observers agree, lies in institutions like First USA and other monoline credit card and consumer- lending specialists.
"If you want to generate substantial growth, you have to go outside of the banking industry to get it," said Charles Wendel, president of Financial Institutions Consulting, New York. "The banks now have lower losses, they have O.K. spreads, they've cut costs, but there's no inherent growth."
Merger and acquisition deals could spread across a broad spectrum of businesses, including mortgages, credit cards, finance companies, leasing, and auto finance.
Conversely, Mr. McCormick said, many regional banks will come to grips with whether they want to stay in these businesses. The portfolios of those that exit likely would go to a select few with economies of scale and other competitive advantages, like credit card monolines Capital One and MBNA.
Such nonbanks have been prospering at the expense of banks in recent years, typically because of their tight focus, quality management, technology, and entrepreneurial cultures. Now they have both the size and margins that banks crave.
Some of the monoline companies also are looking to accelerate their growth by adding product lines. Like First USA, they could be looking to banks, with their big customer lists, as potential partners for diversification.
Bert Ely, a Washington-based consultant, said more mergers involving credit card monolines are imminent. "The monolines stand out when things are going well," he said. "But when things are not going well, they can get clobbered."
One or two of the remaining credit-card monolines - Advanta, Capital One, and MBNA - are likely to become units of banks soon, he said.
"Capital One and Advanta are highly likely to receive overtures from banks in the coming months," predicted Edward V. Blanchard, managing director at Merrill Lynch & Co. and adviser to First USA.
But another investment banker cautioned that the list of viable suitors is short, given market capitalizations like MBNA's $11 billion.
"Banks would buy credit card companies in a second if they could afford them," this merger adviser said. "You can count the banks who can do that on one hand: BankAmerica, Chase Manhattan, and Citicorp."
In the mortgage field, few large companies are available. The biggest, Pasadena, Calif.-based Countrywide Credit Industries, was rumored to have held merger talks a few years ago, but nothing developed.
Thomas O'Donnell, an analyst with Smith Barney in New York, said things have changed since then. "Because of consolidation, banks are much bigger these days and a company the size of Countrywide is not too big to be bought," he said.
Mr. O'Donnell is skeptical, though, that Countrywide would be a target because of its management's independent streak. A more likely target, he said, is North American Mortgage Co., the second-largest independent after Countrywide.
Santa Rosa, Calif.-based North American has been diversifying its lending business and is considering building its servicing portfolio again. At a market capitalization of less than $300 million, it could be eminently affordable.
Other lenders said to be attractive are Money Store, a home equity lender that is also diversifying, and Green Tree Financial, a specialist in manufactured-housing finance. Stock prices of both companies showed small gains on Tuesday.
"The fad du jour is B and C lending," said Tom Healy, director of the mortgage strategies group at CoreStates Capital Group, Fort Lauderdale, Fla., referring to the subprime trend. "We do mergers and acquisitions in midsize and small B and C companies, and there's tremendous interest in these companies."
Another specialized, high-margin area that banks may be looking at is auto finance. Michael Durante, an analyst at Prudential Securities, New York, said profit margins in this area may be higher than in any of the other monolines. And he pointed out the business has been attracting a new cadre of higher-profile finance executives.
Mercury Finance Co., which specializes in loans to people with blemished credit records, would make a logical takeover candidate, he believes. "The company has a great track record, they've set records in earnings every year for the 13 years they've been in business," he said.
He added that the company's servicing portfolio of "a couple of billion" in auto loans offers the scale banks are looking for.
Some banks are said to regard subprime auto lending as too risky, but Mr. Durante said, "A lot of banks were scared of the credit card business not so long ago. When the margins they need are there, they will come around."
He noted that Mercury shares are not selling at a premium versus auto stocks and thus could make an attractive target for a bank.
Leasing companies also are believed to be in play. Milton Waters, president of Tri River Capital, New York, said, "It's open season for these kinds of companies." One company large enough and profitable enough to be a target for takeovers is Financial Federal Corp., he said.
Mr. Ely said growth in gross domestic product has been averaging about 5% a year and financial services need not grow that fast to support the economy. This means banks have to buy market share if they want to hit 15% or higher growth targets. The Banc One-First USA deal, he said, simply got the ball rolling.
