Separating Merger Hype from Reality

Run! Hide the women and children! The merger wave is coming!

That's what one might assume from press reports of Fleet/Norstar Financial Group and Bank of New England, Chemical Banking and Manufacturers Hanover, NCNBand C&S/Sovran and BankAmerica and Security Pacific.

Ignore the fact that three of those four are Eastern Establishment banking organizations. And the fourth, BankAmerica, tried to get into New England earlier this year.

New York-oriented bank stock analysts are having a field day touting megamergers in the foreseeable future. For those of us who live elsewhere in the country, I guess our response would be: "So what?"

Future Prospects

The way things have been going the past three months, it would be easy to believe that the entire banking industry might disappear by the end of this extraordinary year.

From the dismal bank stock market of 1990, some bank securities have recovered to all-time highs, with about as much fundamental strength as last year, when they were suffering all-time lows.

When Chemical and Manufacturers announced their engagement, the headlines touted that they would become the third-largest bank in the United States. Not to be outdone, NCNB and Sovereign/C&S announced that they would become second-largest.

It didn't take Bank of America very long to announce that, with Security Pacific, it would be the second-largest U.S. bank.

Pensive Analysts

Who cares? The New York bank stock analysts. Some institutional investors care a whole lot. And three of four speculators are smiling -- but hoping that the Securities and Exchange Commission doesn't call.

The major reason for all of these mergers has been announced as "overcapacity in the industry" and the ability to achieve economies of scale, improvements in earnings, and significant increases in capital adequacy. This comes from banking organizations whose average rates of return on assets are below industry norms and whose returns on equity are higher than industry averages -- only because they generally have less capital than industry standards.

If there is overcapacity in the banking industry, it is at the money-center and regional bank level, not in the mainstream of America.

Few Big Shots in U.S. Banking

Currently there are 12,200 banks in the United States, 11,000 of which are under $250 million in size. That means all this noise is about 1,200 above $250 million in size. If they all merged into 10 banks, we would still have 11,010.

I am not implying that there will not be further mergers and acquisitions of community banks -- and not all of those below $250 million are independent community banks.

To community bankers, I say: Don't worry about Bank of America looking at your institution next. It is more interested in other areas, such as Boston with its opportunities like Shawmut.

Now that Security Pacific has been lost as a potential competitor, Wells Fargo may have to "beef up" in order to become competitive nationally.

Getting up to Speed

One of these days the southeastern banks will figure how to pole-vault out of their own interstate reciprocity wall, other than through the purchase of failing banks and thrifts. If they succeed, they could become dominant competitors throughout the United States -- on an even footing with other assets.

Not all money-center banks or regional banks are unprofitable. Banc One Corp. is the logical example of one that exceeds the industry standard.

However, most of the extremely profitable, solvent banks are too small to be followed by bank stock analysts. That leaves the analysts nothing to tout except for those 1,200 industry giants whose profitability and capital adequacy lag behind the industry averages.

I believe the merger wave will continue. Look at all the benefits:

* A new name. The old name wasn't so good at either place.

* Overcapacity. That is an interesting word for firing 15% to 20% of the staff.

* Economies of scale. The same result as overcapacity.

* More directors -- to ease the directors' and officers' liability problem.

* Two management teams. That means somebody won the desk struggle. The other guy is going to retire with a golden parachute and become a consultant, assisting others in merging their institutions.

Three-Ring Fanfares

Notorious money-center bank mergers are announced with all the fanfare of the P.T. Barnum circus. But they do not reflect what is going on throughout the nation.

Since the bank analysts can't make any money off of small banks, they act like Pavlov's dog after big banks. Thus, if two big banks hiccup, the entire analysts' community becomes enamored of discussions of big-bank mergers: In some cases, these are self-fulfilling prophecies.

Pressures are placed on large banks and regionals to increase performance, increase stock value, and decrease nonperforming loans. One way they can hold off the Mongolian hordes at the door is to work together in a public relations show, where one plus one will equal three and all will benefit, including the bank stock analysts and their broker-dealer friends.

It is too early to tell, but the 11,000 community banks need not worry. Nobody is interested in them, they are still operating profitably and solvently, and yes, the credit crunch is still with us.

Mr. Austin is president and chief executive officer of Austin Financial Services Inc., Toledo, Ohio.

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