The euphoric bank acquisition market of recent years is taking its toll on bank stocks.

While investors sold bank stocks in 1999 because of rising interest rates and concerns over deteriorating credit quality, they now also are selling because of unfulfilled earnings promises.

That was a key factor late last year that erased the bank stock rally enjoyed between mid-October and mid-November, says Henry C. Dickson, an analyst at Salomon Smith Barney in New York. "The excess value that we are unwinding is not from deteriorating asset quality or fluctuating interest rates," Mr. Dickson said. Instead, he said, the issue this time is that prices were based on returns that never materialized.

While investor concerns about interest rates ebb and flow with the latest economic reports, worries over the true earnings power of banks remain, Mr. Dickson said. The flurry of downward earnings projections issued by banks during 1999 were largely the result of consolidations that occurred in 1997 and 1998, when banks bid up prices as high as five to six times book value. Over the past three years, banks have shelled out $160 billion in premiums to acquire other banks.

A December announcement by U.S. Bancorp that its earnings would be less than had been expected sent the entire bank stock market reeling, with some investors showing signs they had had enough with earnings surprises.

Last month the Minneapolis bank said its earnings shortfall was related to a squeeze on interest rate margins and to integration problems in merging U.S. Bancorp of Portland, Ore., with First Bank Systems of Minneapolis. First Bank Systems bought U.S. Bancorp in 1997 and adopted its name.

Though the market's steep slide after U.S. Bancorp's announcement was characterized by some as an overreaction, it added impetus to a series of similar announcements.

Also, First Union Corp. had trouble integrating Core States Financial Corp., which led to employee and customer defections and other integration snafus. As a result, the Charlotte, N.C., bank failed to meet 1999 earnings targets. Salomon's earnings per share estimate is now 30% of its former peak prediction of $5.

Bank One Corp. found that its First USA unit would not continue to produce the big earnings gains it needed to justify its 1997 sticker price of $7 billion - 520% above First USA's book value at the time. Salomon's estimate for Chicago-based Bank One's 2000 earnings per share is down 32% from the investment bank's peak projection.

Similarly, other big banks have lowered their estimates for 2000: Bank of America Corp, down 18%; KeyCorp, 7%; National City Corp., 7%; SunTrust, 3%; U.S. Bancorp, 18%; Wachovia, 4%.

All told, downward revisions for banks that bought companies in 1997 and 1998 now exceed $6 billion, which prompted investors to dump bank stocks, creating a $90 billion decline in their market capitalization, Mr. Dickson said.

The reasons for the shortfalls are varied, ranging from high acquisition prices, to lofty assumptions of revenue gains and expense savings, to more complex integrations.

The high premiums came about in part because banks were more concerned about expanding their geographic footprints than containing costs, said Michael Laliberte, co-adviser of the Imperial Bank Fund, a portfolio managed by the Retirement Planning Co. of Providence, R.I.

"The banks were guessing they would continue to grow and that just buying the bank would immediately increase their stock prices and that would increase the franchise and everything else," Mr. Laliberte said. "You only had to rationalize the purchase to the board of directors of the bank and the shareholders. Nobody was staying around trying to figure out how it would work. They were on to the next merger."

One big bank that has thus far managed to remain on track is Wells Fargo & Co. Formerly Norwest Corp. of Minneapolis, the bank purchased Wells in 1998, saying that it would take three years to complete the integration of the two companies.

Anything shorter implies "that deals dependent on fast execution and significant productivity enhancements have a higher degree of risk," Mr. Dickson said.

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