The Big Banks Get Set To Branch Out In Earnest

At last, after years of rancorous debate, one of the nation's biggest regulatory blockades appears to be collapsing. The House of Representatives has passed legislation that would allow full interstate banking. A similar bill has been approved by the Senate Banking Committee. The moves reflect in part Congress' desire to avoid a repeat of the early 1990s, when regional banks' locally concentrated real estate portfolios soured.

In many ways, passage of the legislation would be an anticlimax. Big banks from North Carolina to California have used loopholes to set up beachheads in other states. Some groups of states have established compacts that permit mergers within their regions. Yet abolition of interstate barriers will still create opportunities for acquisition-minded banks--and bank stock investors.

HOT ACTION. Wall Street is already busy pushing deals. Rumors have swirled about possible mergers involving such banks as Bank of New York, First Chicago, Providence-based Fleet Financial, and California's Wells Fargo Corp. and First Interstate Bancorp. So far this year, major banks' stock prices have risen 2.6% while the Standard & Poor's 500-stock index declined 4.8%. But the hottest action, once the law is passed, should center on small and midsized banks located in states and regions where interstate barriers have been highest--and where large banks should be most eager to buy in.

Take Missouri. It has long had laws allowing only out-of-state banks from adjacent states to buy in. But if that rule changes, experts say, such Missouri banks as Boatmen's Bancshares Inc., Commerce Bancshares Inc., and Mercantile Bancorp. might be vulnerable--and extremely attrac- tive as stock plays. Boatmen's has an especially tempting franchise stretching from Des Moines to El Paso, and its stock is trading at 33--just 157% of its book value--well below the 200% to 250% that many analysts feel signals potential overpricing. Boatmen's and Banc One Corp. "fit together like a jigsaw puzzle," says Harry V. Keefe Jr., president of Keefe Managers, a money-management and advisory firm that invests mainly in bank and thrift securities. Boatmen's says it plans to keep expanding on its own.

Experts point to a few banks south of the Mason-Dixon line as equally alluring. Soon it will be open season in Virginia, when the state bows out of the Southeast Compact, a deal among nine states that locks out banks from other regions. The Virginia legislature has passed laws allowing full interstate banking this fall, regardless of whether federal legislation is passed. Several portfolio managers and analysts feel Crestar Financial Corp. and Signet Banking Corp. have tempting franchises and are of a manageable size for an acquirer. Signet has a lucrative national credit-card operation that helped it generate a lush 18.2% return on equity in 1993, compared with 13% for Crestar. But Signet's stock is trading at 423/8, 242% of its book value, while Crestar's is at 453/8, or 158% of book--a better bargain.

PRICEY TARGETS. Farther south, most remaining banks big enough to have local-market clout but small enough to be acquired no longer come cheap. Jacksonville-based Barnett Banks Inc., at $38.3 billion in assets the leading Florida bank, is trading at 170% of book--but it is shielded by Florida's being in the Compact. Atlanta's fifth-largest bank, $5.9 billion Bank South Corp., is trading at more than twice book value. Says Edward E. Crutchfield Jr., chairman and chief executive of First Union Corp. in Charlotte, N.C., which has acquired more than 40 banks since 1985: "There's nobody left to acquire. It's over in the South."

Appealing investments exist in other regions, but most are also trading at high prices. Baltimore Bancorp. was selling at nearly twice book before it was acquired in March by First Fidelity Bancorp. Some smaller New Jersey banks seen as potential targets are costlier.

Still, a green light for interstate banking cannot help but boost even some pricey bank stocks. That's "icing on the cake," according to John B. Neff, portfolio manager at Wellington Management Co. in Malvern, Pa. Add that to the rise of nonbank competitors and the need to seriously cut costs, and many bankers will have fewer inhibitions to speed headlong into deals that warm dealmakers' and investors' hearts.

      Many analysts look more kindly on acquisitions at less than 200%  of book value
      Bank                Stock price Price/Book value
      BARNETT BANKS          $47.00       167%
      BOATMEN'S BANCSHARES    33.00       157
      COMMERCE BANCSHARES     31.00       135
      CRESTAR FINANCIAL       45.63       158
      MERCANTILE BANCORP.     36.00       178
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