Investors who bought bank stocks two years ago can't complain. Share prices have risen steadily as the industry recovered from its crisis in the late 1980s. That rebound led many investment pros to conclude that bank stocks are now fully priced or even overvalued. So some on Wall Street are suggesting a new strategy: buy banks that are takeover candidates. Further consolidation is inevitable in banking, they argue, and potential takeover values are not yet reflected in the shares of many vulnerable stocks.
ENTREE VALUE. David Berry, research director at Keefe, Bruyette & Woods, says "spread your bets, because no one knows exactly which banks will go or when." There are lots of takeover candidates, he says, but not all are attractive because some trade at high multiples. One stock he recommends is Bank South. With $4.5 billion in assets, it could offer an out-of-town buyer entry to the huge Atlanta market, or a regional competitor a way to boost share. If sold in the next year or two, Berry figures, Bank South would likely fetch what many banks have sold for recently--2 to 2.5 times book value (table).
Berry also likes First American in Tennessee and the $13 billion Midlantic in New Jersey. Both are attractive to banks outside their regions as a way to enter strong markets, and they could garner takeover premiums of as much as 40% over recent prices.
For analyst Gerard Cassidy at Hancock Institutional Equity Services, "the important question is whether management wants to sell." One of his favorite prospects is $1.4 billion BankWorcester, the largest bank in one of New England's largest cities. Any number of the region's big banks might want to boost access to the Worcester (Mass.) market, which has a large base of blue-collar workers and is underserved by major banks, Cassidy says. What's more, the CEO, Harold Cabot, is 63, owns about 155,000 shares, and could retire on the millions he could make from a sale. As a savings bank, Bank-Worcester would fetch only 1.5 times book, he says.
Some St. Louis banks top Donaldson Lufkin & Jenrette analyst Tom Brown's list. His No. 1 pick is Magna Group, which is dominant in the suburbs and is being eyed by Chicago banks. Brown also likes Shawmut National in Hartford, which is recovering from the banking crisis but faces slow growth in New England.
Investing in takeover stocks can be risky since the banks you pick may not be sold. So seek companies that are expected to do well regardless of whether they are acquired.
BANKS RIPE FOR PICKING? Bank Book Stock Estimated value price takeover (Aug. 23, 1993) value BANKWORCESTER $20.60 $253/8 $32 BANK SOUTH 8.57 161/8 21 MAGNA GROUP 13.76 171/2 24 MIDLANTIC 18.56 25 45 SHAWMUT 14.99 237/8 36 DATA: KEEFE, BRUYETTE & WOODS; HANCOCK INSTITUTIONAL EQUITY SERVICES, DONALDSON, LUFKIN & JENRETTE