Figuring Out If Banks Fit Together

A talk with fund manager David Ellison

David Ellison knows a thing or two about bank mergers: Before joining FBR Investment Services in 1997, Ellison ran a top-performing financial fund at Fidelity Investments for 11 years. His FBR Financial Services Fund (FBRFX ) is up an annualized 11% in the past five years, and his FBR Small Cap Financial (FBRSX ) gained an annualized 22% during the same period. To figure out if mergers will work, Ellison focuses on balance sheets and management's skills. Naturally, he's looking at J.P. Morgan Chase's (JPM ) $58 billion proposed takeover of Bank One (ONE ) and what this deal means for the industry. Personal Finance Editor Lauren Young recently caught up with Ellison by phone.

Are we about to enter a period of bank merger mania?

Consolidation is more noticeable recently, but it's not new. It has been going on forever, especially among small banks, which I favor. Because we've busted out with two large deals in three months, everybody is focused on it.

What's your take on the Bank One deal?

What I am getting -- I own both of these stocks -- is a better mix. Bank One, for example, brings credit cards and money management, where earnings are more stable than in Morgan's trading and investment banking businesses.

What about Bank One's CEO, Jamie Dimon, who is expected to be in charge of the newly combined company?

He's a proven manager and knows the industry, but Dimon hasn't made a tremendous amount for shareholders. Before the deal was announced, Bank One's stock was up 43% since he joined in March, 2000, which is in line with the S&P Bank Index. But many smaller banks have done much better. The challenge is making the merger work.

Are bigger banks better?

From an investment point of view, there's no empirical evidence that bigger is better. Smaller banks like Golden West Financial (GDW ) and North Fork (NFB ) tend to have better returns on equity and assets.

For the average customer, there isn't much of a difference between a big bank and a smaller bank. However, individuals typically love the underdog, and the smaller bank is the underdog. That's why small banks benefit, typically within six months, when there are a lot of big bank mergers.

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