Bank stock analysts are making the counterintuitive point that the recent spate of bank earnings shortfalls may prompt increased merger activity in 2000.
"The connection between shortfalls and mergers is that if you cannot achieve revenue growth, you can do a deal and get revenue by cost savings," said David Berry, a bank analyst at Keefe, Bruyette & Woods Inc.
The popular thinking is that low stock prices stall merger activity, but Mr. Berry said the need for revenue growth may encourage mergers, even if stock prices are depressed.
Mr. Berry said that in some cases, particularly in the Midwest, drops in deposits are the reason for reductions in earnings expectations. But mergers, he said, could substantially bolster a bank's deposit base.
Earnings disappointments were reported mainly by large banks that participated in sizeable mergers in 1997 and 1998, moves that depressed their share prices.
Merger volume fell 74.5%, to $324 million so far this year, from $1.2 billion between January 1998 and Dec. 9, 1998, according to statistics compiled by Sheshunoff, a Thomson Financial Co. affiliate.
Some analysts argue that that merger activity is likely to pick up. "Only a handful of banks have disappointed the market," said Eric Rothmann, an analyst at First Security Van Kasper of San Francisco. "And although not all bank deals done were made in heaven, consolidation will continue next year at a relatively robust pace.
"Bankers are eventually realizing that they cannot get the stock prices that they got before," he said.
"The revenue challenges are just another catalyst" to prompt merger activity, said Katrina Blecher, a bank analyst at Brown Brothers Harriman. "All we need are the prices to come up so deals can get done."
Others are somewhat skeptical. Harold Schroeder of Schroder & Co. said banks are facing a challenging revenue growth environment, but these conditions will not be enough of an impetus to get them to merge.
"When bank stocks are weak, it is more difficult to get more deals done," the analyst said. "Bankers do not like to sell unless their stocks are at their all-time highs.
"Some bankers will recognize that revenue is a problem and will sell out at these prices, but many others have to pierce the psychological barrier of selling at a lower share price."
Many bankers still believe that they can sell their companies at the same high prices they got in 1997, Mr. Schroeder said. Bankers who sell their companies want to be able to say they sold at "the country club price, which is the price they want to quote once they are inside the country club."
Nancy Bush, an analyst at Ryan, Beck & Co. is also less optimistic about increased merger activity. "The buy 'em and strip 'em strategy has now been firmly discredited," Ms. Bush wrote in her report after U.S. Bancorp said its earnings would fall short of estimates. "All the companies that have surprised thus far have been active acquirers and have been of the 'cut costs dramatically to recoup dilution' persuasion.
"What this means for the deals in 2000 is still a big question."