Two Banks Out To Tie The Knot Or A Noose

Can two minuses add up to a plus? That's the vexing riddle that emerges from the plan Bank of Boston Corp. and Shawmut National Corp. hatched on Sept. 23. The two big New England rivals, among the weakest big banks in the nation, want to join forces and reclaim some of the old luster that has been lost in the region's ailing economy. The twosome are hoping they can ride the current bank consolidation wave and gain the Washington and Wall Street O. K.s needed to swing the deal.

This proposed union has some good arguments going for it. Combining New England's second- and third-largest institutions would yield a weighty entity: the nation's ninth-largest bank, named Bank of Boston, with $56 billion in assets. Like the other mammoth bank pairings lately, such as Bank of America and Security Pacific in California, the New Englanders project major cost savings. By closing overlapping branches, streamlining back-office operations, and lopping off 11% of their 27,900-member work force, they are aiming to save $300 million annually by 1994.

CRIMPED. But there are better arguments that the laws of mathematics will not be repealed, that two minuses will add up to another minus. At one time, Bank of Boston was a worthy competitor with the New York money-center banks. Shamut, which grew rapidly with numerous acquisitions in the 1980s, had a solid position in middle-market lending. By the late 1980s, though, both found themselves with a pernicious passel of bad real estate assets. Bank of Boston currently has $2 billion, while Shawmut has $1.7 billion. Neither bank has made a profit since the third quarter of last year, and neither is likely, analysts say, to make much money until at least 1993. Their executives wouldn't comment.

No surprise, then, that the banks' capital levels are barely in compliance with regulatory minimums. Lack of capital has crimped their ability to do more business and handle more sour loans.

To make the deal fly, the two banks plan to raise $625 million in fresh equity. The investment community, though, isn't wild about shoveling capital into such an enterprise. "I don't see a lot of upside to the merger," says Phil Dubuque, portfolio manager at Invesco Funds Group Inc. "Whatever the banks get out of expense savings will go into maintaining the real estate." Says another investor: "We're not interested in bottom-feeding."

Even if they do raise the money, the merged entity will not exactly be a powerhouse. Under a scenario devised by the Keefe, Bruyette & Woods Inc. securities firm, which assumes the money will be raised, the new bank's capital ratios will still lag behind those of their peers (table). Further, fresh equity will do nothing to make a defaulted borrower suddenly resume payments. Some 10% of the loans on the merged balance sheets would be nonperforming, a level regulators consider highly dangerous. While bad loans have shown some signs of leveling off at the two banks, there's no guarantee the trend will persist.

A LOT OF PAIN. Hopes that the merger will succeed must also contend with history, which isn't encouraging about combining weak banks in the same market. Exhibit A: the 1987 deal between Dallas-based InterFirst and RepublicBank to form First RepublicBank. Both banks promised to cut costs by some $600 million, but within a year, they collapsed under a tidal wave of bad real estate loans. After a great deal of pain, North Carolina's NCNB took them over.Like Texas in the mid-1980s, New England is suffering a severe downturn. With no healthy industries to spark a turnaround, the region can expect nothing better than a long, slow recovery, say economists. "So any time you do a merger of this type, there's clearly risk," says Bert Ely, an Alexandria (Va.) banking consultant.

Worse, the Bank of Boston-Shawmut combo would face tough competition on its home turf. The supercharged Fleet/Norstar Financial Group Inc. in Rhode Island, which in April used financial backing from the Kohlberg Kravis Roberts & Co. buyout firm to scarf up the failed Bank of New England, beat out a bid from Bank of Boston. Today, Fleet is the No. 1 bank in New England, with big ambitions and deep pockets.

The outlook for the merger, in short, is murky. The banks are under severe regulatory oversight covering dozens of their operations, ranging from restrictions on lending to requiring capital plans for subsidiary banks. Even so, regulators are divided over whether or not the banks would stand a better chance together than apart.

Ultimately, the deal is an exercise in making the best of a bad situation. "Without a merger, they could return to marginal profitability," says Keefe, Bruyette & Woods analyst David Berry. "But there's surviving, and there's prospering." On the New England banking scene these days, survival may be the best these two ailing banks can hope for.

                     Nonperforming assets  Return on
                                vs. loans    assets
      BANK OF BOSTON*              8.8 %  -0 .67%
      SHAWMUT*                    11.2    -1 .05
      BANK OF BOSTON-SHAWMUT**    10.0     0 .40
      BIG BANK AVERAGE*           4.6     0 .63
      * As of June 30** Projected after one year, assuming $625 million equity 
      infusion 29 largest U. S. banks