Stocks: Prices Spur Banks to Invest Internally Instead of Buying

With acquisition prices hitting record levels, bankers told analysts Thursday that they are reemphasizing internal growth as a way to boost earnings.

In presentations at the annual symposium in New York of the Bank and Financial Analysts Association, even Fleet Financial Group, one of the industry's most aggressive acquirers, preached the merits of deploying its capital internally.

Norwest Corp. also told the 200 analysts that it expects plenty of growth ahead by cultivating existing operations.

Eugene M. McQuade, vice chairman and chief financial officer at Fleet, said potential share buybacks and internal growth over the next five to 10 years are alternatives to acquisitions.

Financial institutions, Mr. McQuade said, have the opportunity to use their existing operations more aggressively to win back ground in areas, like corporate lending, that they have let slip.

"Banks can get back in and in some cases get to dominate," he said.

Aside from nurturing business lines, banks should invest heavily in front-line people to spur more selling, Mr. McQuade said. "Right now, ourplatform people are very good at opening checking accounts. Five years from now they will have a much broader product capability."

But Mr. McQuade made clear that Boston-based Fleet hardly plans to pull out of the acquisition game. The approach "is a big part of our strategy going forward," he said.

Indeed, his comments came just a month after the company's most recent purchase-of discount broker Quick & Reilly-and Mr. McQuade indicated at the conference that similar purchases are possible.

But analysts said Fleet may have to pull back a bit from purchases at least in the short term because its shares trade at a discount to many other banks.

"They might not have the currency right now to do something splashy,"said Thomas F. Theurkauf, an analyst at Keefe, Bruyette & Woods.

Norwest has never made a purchase of more than $5.5 billion and generally acts during slack periods in the merger game when relative bargains are available, said John E. Ganoc, executive vice president for corporate development.

With premiums of four and five times book value commonplace right now, the company sees very little that is appealing.

"When prices go down, we'll probably be a buyer," Mr. Ganoc said. "We're very, very disciplined in terms of what we buy and pay for it."

With a broad product line and over 3,800 branches, Norwest is focused on operational approaches like cross-selling and cultivating its most profitable customers, Mr. Ganoc said. "We want to earn 100% of every creditworthy customers' business."

His comments rang clear to analysts, who said the Minneapolis company has a track record for polishing existing operations.

"They have strong internal methods" for fueling growth, said Diane L. Merdian, banking analyst with NationsBanc Montgomery Securities.

For the day, Fleet shares rose 81.25 cents, to $83.5625, and Norwest was up 31.25 cents, to $43.375.

The Standard & Poor's bank index rose 1.17%, and the Dow Jones industrial average was up 0.31%. The NASD bank index was up 0.28%, and the S&P 500 moved up 0.39%.

For reprint and licensing requests for this article, click here.
MORE FROM AMERICAN BANKER