As nationwide interstate banking legislation nears the stretch run in Congress, a debate is emerging about whether the event will be an earthquake or a mere tremor on Wall Street.
"The bill is a major unshackling of industry restrictions," said George M. Salem of Prudential Securities. He labels it "one of the most important pieces of legislation ever to affect banking - especially in a positive way."
Federal interstate banking prohibitions over the past 70 years "have loomed as major barriers to efficiency and revenue enhancement" for this industry, he stressed.
Flood of Deals Unlikely
The bill's final passage could well produce a new rally in bank stocks, Mr. Salem said, "even though much of the industry is already free to merge across state lines."
A quick flood of new merger deals is unlikely, however, he said, especially in view of the expected one-year phase-in period of the law.
But some deals will ultimately result, and Mr. Salem last week listed 14 top candidates in seven key states for takeovers by out-of-state bank holding companies.
Top Interstate Takeover TargetsNew Jersey * Summit Bancorp * UJB FinancialVirginia * Central Fidelity * CrestarPennsylvania * Integra * CoreStatesMissouri * Mercantile * Boatmen'sOhio * Star Banc * HuntingtonMichigan * Michigan National * First of AmericaIllinois * First Colonial * First Midwest
New Jersey ranked highest in potential acquisition activity, because of the number of likely acquirers who would like to enter the state. Summit Bancorp. is the most likely target.
Although Mr. Salem has plenty of company in speculating about consolidation, there are those who doubt that an interstate branching law will emerge this year. Federal Reserve Governor John P. LaWare, for example, recently told the American Bankers Association that it may prove impossible for a conference committee of the House and Senate to agree to the details of final legislation.
Others are skeptical that the era of unrestricted nationwide interstate banking will amount to more than much ado about almost nothing.
"All evidence points to a hype," according to Mark T. Lynch of Lehman Brothers Inc., who thinks "legislation is not the primary obstacle to the national consolidation of the banking system."
The major bottleneck slowing consolidation, Mr. Lynch said, is a lack of banks willing to sell themselves, rather than a lack of buyers being held back by the force of law.
"The institutions that have sold out over the last 18 months have been primarily thrifts and banks recovering from real estate problems," he noted.
Why Sell Now?
"With the industry earning 1.3% on assets, there is little pressure on the healthy, medium-sized banks to sell," Mr. Lynch said.
Mr. Lynch has calculated a "mortality table" that predicts the rate at which different types of institutions with assets from $1 billion to $5 billion sell out, based on deals during the past 18 months.
Banks that have emerged from serious problems are eight to 10 times more likely to sell out than consistently healthy banks, according to Mr. Lynch's data. He defines a "formerly sick bank" as having endured an annual loss during the past five years.
Only One 'Healthy' Sale
He noted that two of the three large banks sold in the past 18 months - MNC Financial Inc., Baltimore, and Continental Bank Corp., Chicago - also meet his definition of "formerly sick." Only one, Society Corp., Cleveland, did not.
"There are fewer and fewer formerly sick banks all the time," he said. "What happens when that vein of ore is played out?"
Mr. Salem also cautioned that the number of sizable deals of in the era of interstate banking "could prove disappointing." The primary reason, he said, is that those banks willing to sell generally anticipate far higher prices than buyers are willing to pay.
But with banks facing heavy competition and holding an eroding share of the financial system, the Prudential analyst thinks acquisition prices in banking will fall in the longer run because the value of core deposits will shrink.
