Bank stocks haven't set the market on fire since Congress enacted nationwide interstate banking legislation, but an Atlanta analyst thinks investors who hang on won't be sorry.
Mergers and acquisitions, perhaps including a few blockbusters, should help make the rest of this year and next year both interesting and rewarding, said Kathryn H. Bissette of Sterne, Agee & Leach Inc.
Banks can begin acquiring banks in any other state one year after President Clinton signs the bill into law. He will do that in a ceremony now set for Thursday afternoon.
But given the lead time required for banking deals, usually six months and sometimes more, industry consolidation activity allowed by the new law could begin percolating much sooner.
Several banking analysts along Wall Street think the industry is long overdue for announcement of a major merger or acquisition. They think such news could help recharge bank stocks generally.
Ms. Bissette sees more than a few possibilities.
In general, the analyst has a "strong hold" recommendation on banks right now. But she sees exceptions where valuation, earnings prospects, and takeover potential create buying opportunities.
A good prospect to merge in the short term, she said, is Fleet Financial Group. The Providence, R.I., holding company is "apparently for sale or looking to do something."
Imminent entry of Fleet's region by previously excluded bidders, the southeastern superregional banks, will stir the pot and "probably mean a transaction announcement before yearend," she said.
The new federal law spells the end of the Southeast Compact. First meant to shut out large banks from beyond that region, the compact now effectively hems in powerful superregionals like NationsBanK Corp. and First Union Corp.
Other candidates for "potential surprise acquisitions" before the end of the year, Ms. Bissette said, are Bank of Boston Corp.; First Interstate Bancorp, Los Angeles; and First Bank System, Minneapolis.
Further down the road, the analyst anticipates an acquisition of Barnett Banks Inc., Florida's last major independent banking company, within a year to 18 months.
BankAmerica Corp., San Francisco, and Banc One Corp., Columbus, Ohio, barred from southeastern deals before the new law, are both potential bidders for Barnett, she said. Indeed, she said, BankAmerica "has the capacity to look at several different deals" around the country.
New York's Chemical Banking Corp. also cannot be ruled out as a bidder, she said. Neither can Citicorp, the nation's largest bank.
Ms. Bissette foresees a possible merger of equals for two highly respected southeastern banks, Wachovia Corp., Winston-Salem, N.C., and SunTrust Banks Inc., Atlanta.
"Both are conservative, high-quality companies, but neither has seemed interested in striking out on its own and making a strategic acquisition of another bank," she said.
A combination of the two banks would put both these companies into strong new markets, she noted. Wachovia has no presence right now in Florida, where SunTrust has the fourth-largest statewide market share. SunTrust has no presence in the Carolinas, where Wachovia is a long-established power.
Should they not combine, or pursue expansion courses of their own, "SunTrust is likely to be acquired within a couple of years and Wachovia within five years," she said.
Also likely targets of buyers are two major St. Louis banks, Boatmen's Bancshares and Mercantile Bancorp. The new federal law will open up Missouri to buyers beyond adjacent states.
Banks in Mississippi and Alabama could be similarly affected by the new law, which opens borders of those states and in doing so may provide an opportunity for investors, Ms. Bissette said.
Mississippi and Alabama had not been expected to widen their own interstate banking laws this year, she noted, so shares of selected banks there may still offer "undiscounted potential" for investors.
Shares of Deposit Guaranty Corp., Jackson, Miss., and Colonial BancGroup, Montgomery, Ala. appear to hold "the most upside capital appreciation potential," she said. The analyst recommends "immediate aggressive purchase" of both stocks.
Ms. Bissette said she "would not be surprised" if Deposit Guaranty is an acquisition target within the next 18 months. That could occur "at a price of $50 to $55, about 15 times our 1994 [earnings] estimate of $3.50 per share, or 2.2 recent book value."
Given the recent $32 price range for shares of Deposit Guaranty, "considerable upside is still-present," she said.
Colonial BancGroup could be bought within two years at a price exceeding $40 per share, Ms. Bissette said. That would be about 15.4 times her 1994 estimated earnings and 2.4 times the recent book value of $16.40. The shares have recently traded around $23.
The most likely buyers for these banks are the midwestern superregionals, she said, rather than the southeastern giants.
She noted as a precedent Boatmen's planned acquisition of Worthen Banking Corp., Little Rock, for a price equal to 2.2 times book value.
"Midwestern banks may have more of an appreciation for the superior fundamental banking attributes of Mississippi and Alabama banks" than banks from other part of the South, she said.
In addition, she said last week, the midwestern institutions "are more attractive to stable growth areas like their own, instead of boom-bust areas like Atlanta, the Washington, D.C. metropolitan area, or Florida.
As an example of this apparent attraction, she noted that two major banks based in Columbus, Ohio, have ventured into West Virginia, with its slow but stable growth pattern.
Banc One Corp. bought Key Centurion Bancshares for 1.8 times its book value in 1992, and Huntington Bancshares acquired another Charleston bank, CB&T Corp., for a similar multiple.