For Subscribers

Get the complete article now!

Five analysts and top management from twenty-five sector firms examine the eastern regional banks sector in this special 127-page Eastern Regional Banks issue from The Wall Street Transcript, available at (212/952-7433) or http://www.twst.com/info/info481.htm.

TWST: For the most part, have the super-regionals that you follow broadened their geographic footprint through the acquisitions that they’ve made, or do they still tend to be clustered around their traditional regions?

Ms. Thompson: Over the past 10-15 years, we’ve seen a significant expansion of super-regional footprints across the United States. Sleepy regional banks, which before interstate banking rules were relaxed were restricted to one state in some cases, have grown into huge multi-state entities, sometimes dominating major regions of the country.

TWST: What’s your thinking about the mergers and acquisitions that have taken place in this sector of the banking industry over the past 12-18 months?

Ms. Thompson: Bank M&A activity has really slowed significantly from the peak years of 1997 and 1998. In 2001 there were 179 bank acquisitions completed, compared with over 400 in 1998. I think a big reason for the slowdown is that acquirors are being much smarter about the deals they are willing to do and the prices they are willing to pay. Gone are the days when acquiring banks would pay huge premiums for marginal franchises that were justified by unrealistic cost savings or revenue enhancement assumptions. I would argue that investors have forced banks to be smarter by penalizing the stocks of those that have engaged in shareholder value-destroying deals. This is a very good thing for the industry, but on the other side of the fence, bank managements that thought they would benefit from a big takeout premium have had to ratchet their expectations downward. That said, I think we will see a rebound in bank M&A activity over the next two years, although we are unlikely to see a return to the levels of the late 1990s. There is still a real need for consolidation in this industry. That’s because there are a tremendous amount of inefficiencies that still need to be wrung out of this industry. Scale is very important in this business because fixed costs, such as technology, can be allocated over a broader base, and that makes it more efficient. So the need for consolidation still exists and banks are being smarter and more realistic about pricing. But my feeling is that most of the activity will be among the small and mid-cap players, with the super-regionals focusing on more bite-sized traditional bank acquisitions or non-traditional bank acquisitions such as asset management and investment banking, or possibly insurance.

TWST: We haven’t talked specifically about PNC Financial Services Group (NYSE:PNC). This is one that you have had a buy on, I believe. What was the rationale behind the buy and what’s your thinking on the stock today?

Ms. Thompson: PNC Financial is a bank that has been slowly improving its business mix by taking credit off the books and expanding into high growth businesses such as asset management and mutual fund processing in a big way. So they’re moving from a traditional bank to a more diversified financial services model. It has taken a little longer to make that transition than maybe some investors had hoped, but I think they’re making the right moves and they have taken a significant amount of credit risk off of their balance sheet in the process. I think they’re well positioned to earn a premium multiple to the group based on their superior business mix and lower risk profile.

TWST: Jennifer, in conclusion, what would your overall message be to investors who are looking at the bank stocks for 2002, particularly at the super-regionals?

Ms. Thompson: My message is that investors need to be selective among the names. It’s still a difficult operating environment with potential downside risk to the estimates due to credit cost, so it is important to focus on the companies that have sufficient balance sheet strength to sustain them through the difficult economic times and the revenue-generating capacity to grow at healthy rates over the longer term.

This special issue includes:

1) Eastern Regional Banks - In an in-depth (13,500 words) Analyst Roundtable, Nancy A. Bush, Managing Director at Ryan Beck & Co., Gerard S. Cassidy, Managing Director of Equity Research at RBC Capital Markets and Christopher Marinac, Managing Director at SunTrust Robinson Humphrey, examine the outlook for the sector including stock performance in 2001, regulatory outlook and share specific stock recommendations.

2) Super-Regional Banks - In an in-depth (4,100 words) Analyst Interview, Jennifer A. Thompson, Analyst at Putnam Lovell Securities, Inc., examines the outlook for the sector including and shares specific stock recommendations.

3) Eastern Banks - In an in-depth (3,100 words) Analyst Interview, Jacqueline Reeves, Managing Director at Putnam Lovell Securities, Inc., examines the outlook for the sector including and shares specific stock recommendations.

4) The TWST confidential Off-The-Record survey of management performance of nineteen sector firms asked market insiders about the ability of management teams to create shareholder value.

5) CEO interviews (average 2,500 words). Top management of twenty-five sector firms examine the outlook for their firm and the sector.