As generating traditional revenues becomes ever tougher for banks, their tendency toward buying nonbanking businesses that offer better returns will grow ever stronger, according to investment bankers.
The trend is also being reinforced by the waning of big bank acquisitions, according to William M. Weiant, managing director at Morgan Stanley, Dean Witter & Co., New York.
More than ever, asset management and other more profitable areas are the focus of attention, Mr. Weiant said here this week at a conference sponsored by Bank Director magazine called, "Acquire or Be Acquired."
"Banks we work with are trying to find higher-valued businesses," said Mr. Weiant, who worked on Deutsche Bank's acquisition of Bankers Trust, SunTrust Inc.'s acquisition of Crestar, and Bank One's purchase of First Chicago NBD.
He said bankers are asking "How do I get into asset management, how do I get into trust processing? In 1999 we are spending the bulk of our time helping banks reposition themselves, so that they can move into these higher yielding areas."
The change in strategy comes at a time when the volume of the bank deals is sluggish.
Mr. Weiant noted that the number of midsized bank transactions is likely to stay relatively high, but there are fewer high-profile, big-bank deals on the horizon.
The investment banker predicted that the overall value of bank acquisition activity this year may be about $50 billion, compared to $276 billion last year.
Big-bank activity is not likely to pick up again until next year, as large acquirers digest last year's sizable transactions and others remain on the sidelines because of slack stock valuations, said Mr. Weiant. Merger activity also has stalled because investor enthusiasm soured on many of the larger deals.
James J. McDermott Jr., chairman and chief executive officer of Keefe Bruyette & Woods Inc., agreed that there is investor concern about large bank deals. "The concern with larger deals lies less with size and more with fit," he asserted.
"Are the cultures compatible? Will the succession occur smoothly. These are key issues that need to be resolved-plus we have a whole generation of banker managers who are untested at these levels of size and market capitalization," he said.
Banks that are hesitant to refocus themselves are likely to suffer, said Mr. Weiant. He said traditional "vanilla" banks such as Amsouth, Compass Bankshares, Union Planters and First Tennessee have suffered among the worse stock market performance and the lowest estimated growth rate by analysts.
He said the typical price-earnings multiple for money center banks is 15.1 times 1999 earnings and for regionals 14.6 times next year earnings. By contrast, multiples for discount brokerages range up to 62.3 times 1999 earnings.
Indeed, even Mr. McDermott pointed out that bank stocks are relatively unattractive right now.
If the market does not reward the traditionally-oriented companies, they will either have to restructure themselves or sell, Mr. Weiant said.
But repositioning is easier said than done. While some banks such as Mellon Bank Corp. are moving out of mortgage banking and credit cards into higher yielding asset management, other banks do not have that option, said Mr. Weiant.
"Most banks that try to reposition or restructure don't have a higher value business that they can focus on," the investment banker said. "It's hard to find a business that is highly profitable, grows rapidly and can be had at a reasonable price."
Mr. Weiant believes investment bankers are likely to have their plates full directing banks into other areas. The environment is expected to be daunting as revenues come under pressure, stocks prices fall and the economy slows.
"People who are recommending bank stocks somehow feel this is an industry that can grow 11%, 12% or 13% per year in terms of earning per shares," Mr. Weiant said.
"I would be extremely doubtful of that," he said. "Over the next few years, the 10% rate of growth is going to slow and it's going to be a more difficult environment."