The dam will eventually burst on bank takeovers and it's likely to happen next year, according to analysts at Bear, Stearns & Co.
There will probably be few large acquisitions this year because of depressed bank stock prices, but pent-up demand and improved market valuations will lead to a torrent of deals in 1996.
It could happen even earlier if interest rates rise no further and bank stocks rally, said Michael K. Diana and Christopher C. George.
Their favorite states for acquisition activity are, in order, New Jersey, Pennsylvania, Virginia, and Missouri.
Their top bank takeover targets are Midlantic Corp., Edison, N.J.; Integra Financial Corp., Pittsburgh; Crestar Financial Corp., Richmond, Va.; and Mercantile Bancorp., St. Louis.
The analysts say the two major takeovers unveiled so far this year "are aberrational and not representative of a trend" toward a greater level of dealmaking soon.
The sale of Michigan National Corp. Farmington Hills, Mich., to National Australia Bank "was forced by a threatened proxy fight that, in our view (and apparently in the view of the Michigan National directors), would have been successful," they said.
The fact that the buyer was a foreign bank indicates that U.S. banks "couldn't afford to be as aggressive," they said. The analysts do not expect a rash of foreign bank takeovers of U.S. banks, but noted that the weak dollar does make such deals more likely than in the past.
The other major transaction this year, the sale of Shawmut National Corp., Hartford, Conn., to Fleet Financial Group, Providence, R.I., was "driven, in part, by personal considerations of its chairman (Joel B. Alvord) and in part by fear of a rumored takeover of Bank of Boston by Fleet, leaving Shawmut as 'odd man out.'"
Generally right now, the analysts said, bankers who are potential buyers are hesitant "because they cannot afford to meet the price expectations of sellers without taking earnings-per-share dilution, and because they don't want to issue billions of dollars of their stock at prices they believe are too low."
Potential sellers, on the other hand, "are holding back because their balance sheets are in good shape, and they think they can get a higher price if they wait."
For the balance of this year Mr. Diana and Mr. George expect to see banks acquiring thrifts and nonbanks. Thrifts have an incentive to sell, they noted, because they face the prospect of paying much higher deposit insurance premiums than banks.
These tend to be smaller deals and can be structured under purchase accounting methods that allow acquirers to reduce dilution and leverage the overcapitalized positions that are now a management concern at some banks.
But "banks still want to buy banks," the analysts asserted, because they prize the customer relationships that can only be acquired through such deals.
"Virtually all large banks have gotten where they are through dozens of acquisitions and have become increasingly adept at achieving consolidation benefits," the Bear Stearns analysts said. "We see no reason for this to come to a screeching halt."
Mr. Diana and Mr. George dismiss the notion that high asking prices are blocking deals and must come down. Banks will again be bought at healthy premiums as soon as buyers' stock prices permit it.
In fact, they said, prices paid for banks have been fairly consistent for the past decade at around 15 times trailing earnings of the bank being bought. That translates to a 25% to 40% premium to the stock market price of the takeover target.
The analyst see two possible dampeners of takeover activity.
First, some banks otherwise ripe for acquisition have gotten large enough to seriously reduce the number of possible buyers. This category includes Barnett Banks Inc., CoreStates Financial Corp., First Bank System Inc., First Chicago Corp., First Fidelity Bancorp., and National City Corp.
Second, the recent prevalence of stock buyback programs to reduce excess capital could prevent pooling-of-interests, the most popular method of accounting for deals between banks. The analysts see this as an issue, though less probable as a widespread problem.
But for many potential sellers, they said, the "easy times are past" and earnings-per-share growth will be increasingly hard to achieve, helping set the table for greater dealmaking in the not-too-distant future.