Banco Bilbao Vizcaya Argentaria SA could pursue more U.S. bank acquisitions as early as next year to build on its September purchase of Compass Bancshares Inc., said the executive tapped to lead the integration.
BBVA executives are "receptive" to further expansion, Garrett Hegel, who is to take over as the president and chief executive of Compass Bancshares on Jan. 1, said in an interview this week. However, "it's not something I'd think about until midyear," he said. "We need to show a couple of quarters of positive trends so that their investors will be much less nervous."
Mr. Hegel, 57, who is currently Compass' chief financial officer, discussed a number of strategic issues but gave few details on where BBVA might look. However, he did say that the $702 billion-asset Madrid company has no immediate interest in increasing its exposure in Florida, which has been hit hard by the mortgage slowdown and corresponding decline in real estate values. "There is a long-term luster there, but I'd be wary right now," he said. "Perhaps a year from now it will be different. … It will come back, though."
In recent months BBVA executives have said they would like the U.S. banking operation to contribute 10% of the parent's overall profit by the end of 2008. Though BBVA's executives have played down the need for more acquisitions, Mr. Hegel said that the weak dollar and tougher operating environment could create opportunities.
"U.S. banks look pretty cheap from Europe's perspective," Mr. Hegel said, adding that BBVA has a long-term view of the U.S. economy that goes beyond the current turbulence. "They feel that this is a good market and one where they want to be a future player."
However, for now, the focus is on integrating BBVA's Texas banks onto Compass' platform, a responsibility that Mr. Hegel will inherit from D. Paul Jones Jr., who the company said last week would retire as CEO at yearend. Mr. Jones, 65, is stepping down 14 months earlier than expected. Asked why, Mr. Hegel referred the question to Mr. Jones, who through a spokesman declined to comment.
BBVA plans to merge four banks into a single legal entity next quarter. It will move State National Bancshares to the Compass platform in the second quarter, Texas Regional Bancshares in the third quarter, and Laredo National Bank in the fourth.
Javier Bernat, an analyst at Caja Madrid, said Tuesday that he expects BBVA to remain on the sidelines until it completes the integration; it may not make "any relevant deal" in the United States before 2009, he said. "There is the potential for second waves of defaults or impairments in the banking sector … and BBVA's management is very conservative regarding acquisitions," he noted.
Mr. Hegel said that for the most part he feels good about the bank's exposure.
A large part of his comfort is tied to Compass' expansion strategy under Mr. Jones, which focused more on Texas than Florida, where several Alabama banking companies have pursued growth. Since 1997, nine of its bank deals have been in Texas and just two in Florida, where it hasn't bought a bank since January 1998.
"We're not immune to what's going on in the economy, but with BBVA, about 60% of our franchise is in Texas," Mr. Hegel said. "The state is still doing pretty good. The rate of growth there has slowed, but it's still growth."
Compass is seeing pressure in smaller markets such as north Florida, Phoenix, and Denver, though he said the consumer portfolio is holding up well. Compass retains about half the mortgages it originates, and most of the loans it keeps are with its wealth management clients. "Everything is centrally underwritten and focused" away from subprime, he said. "We rescore it every two months, and every portfolio scores well over 700 points. It is A-quality paper that continues to perform well."
In the third quarter, Compass Bank's mortgages and home equity loans on nonaccrual status were 0.05% of total loans, unchanged from the second quarter and up 1 basis point from a year earlier, according to Federal Deposit Insurance Corp. data.
Mr. Hegel, however, said the greater challenge involves Compass' residential development loans. The ratio of nonaccruing construction and development loans at the bank fell 1 basis point from the second quarter but rose 21 basis points from a year earlier, to 0.23%, according to the FDIC data.
"The stress that we have seen has come from lending money on projects that were targeted for [first-]time homebuyers," he said. "The dry-up of available credit … hurt those projects. We think we have done a pretty good job of identifying the problems, but it's not going to be a quick fix."
Though credit quality is deteriorating, other credit metrics as of Sept. 30 were less alarming. Net chargeoffs to average loans in BBVA's U.S. banking operation were 0.32% in the third quarter compared to 0.42% for the 20 largest U.S. banks, according to materials provided as part of BBVA's investor conference last month. Its allowance for loan losses was 1.24% of total loans, compared to 1.13% for peer banks.
Caja Madrid's Mr. Bernat said BBVA's greatest challenge remains the integration as it moves more than 600 branches onto a new technological platform that replaces Compass' product-oriented banking model with one that is customer-focused. "This Spanish way of doing banking is currently the largest risk for the management team," he said, "and, if it is not done properly in time and quality, could end up leading to BBVA's retreat from the" United States.
Meanwhile, Mr. Hegel said BBVA plans to continue using the Compass brand through the State National conversion, though the company is doing research to determine whether any changes are needed. "At some point we may need to attach some kind of BBVA brand, [as] they do in Mexico with BBVA Bancomer," he said.
