A larger-than-normal disparity between the performances of stocks of small and large banks could usher in another wave of bank mergers, analysts predict.
In the last eight months, shares of community and small regional banks have languished, while those of banks with more than $50 billion in assets have soared along with other large-cap corporations.
"By definition, if the currency of buyers appreciates more than those of sellers, it makes a more conducive environment for mergers," said Sean J. Ryan, bank analyst at Bear Stearns & Co.
The disparity in stock performance between large and smaller banks comes as institutional and retail investors pile into large-cap bank stocks because of their liquidity.
Many midsize bank stocks also have fallen. In 1995, for example, the median price-to-earnings multiple of medium-size banks was 3.8% more than that of large banks, according to statistics compiled by Bear Stearns. That year saw one of the biggest waves of consolidation in recent history.
Now the midsize banks trade at an 8.5% discount to the large banks.
For some time, a raging bull market boosted the stocks of all banks. But in recent months, the market has differentiated between those banks that are preparing for a possible slowdown in the economy and those banks that "think it's just business-as-usual," said Mr. Ryan. Those that stumble are likely to be taken over, he said.
Mark T. Fitzgibbon, associate director and bank analyst at Sandler O'Neill & Partners LP, also said he believes that a new wave of bank mergers is on the horizon-particularly deals between banks and thrifts.
"Thrifts have been particularly hard hit," said Mr. Fitzgibbon. "And in some cases, the only entry that a bank has into a good market is to buy a thrift."
The price-to-earnings ratio for the Standard & Poor's bank index-a proxy for big banks-is 15.6 times 1999 estimated earnings. By contrast, the price-to-earnings multiple at thrifts is only 12.6, according to Sandler O'Neill's thrift index.
Yet Mr. Fitzgibbon argued that the differential between thrifts and banks is not necessarily because of performance. The earnings growth rate for thrifts is 11.9%, which is higher than the 10.6% projected for midsize banks and in line with the 11.4% rate of the large banks.
"Some of these institutional investors have hemorrhaged because of redemptions, so now they prefer to be in liquid stocks which they can trade out of easily," said Mr. Fitzgibbon.
Nancy Bush, a bank analyst at Ryan Beck & Co., Livingston, N.J., has also noticed the widening gap between the performance of small and large bank stocks. However, she doubts that it will stoke another big wave of merger activity.
"We just don't have clear evidence yet," she said. "If anything, merger activity will be episodic."
In fact, for some small banks, "Business couldn't be better because they are cleaning up from the fallout that has occurred from some of the bigger mergers," said Ms. Bush, referring to the loss of customers when big banks merge.
Still, she added, "As economic conditions get worse, a lot of bank managements will have to do a lot of soul-searching about selling as they hit these revenue walls." When it comes to performance at some of these companies, she warned that "some of these boards have to be getting impatient."