Richard Bove, one of Wall Street’s top bank analysts, sees a frenzy of mergers coming in that industry within three months.
That’s because bank stocks have fallen so far that they have turned into excellent bargains, the Ladenburg Thalmann analyst tells Bloomberg Television.
“We’re hearing from a number of investors,” he says. “Saudi Arabia, Greece, Korea, China — they all want to put their money into American banks.”
And why is that? “First, these countries have strong currencies versus a weak currency in the U.S.,” Bove notes, making the acquisitions cheaper.
“And second, I know people are freaking out over the loan side of banks’ balance sheets,” he says. “But bank stocks have dropped to such a low price, that they are almost ridiculous in terms of their value.”
Bove cites Washington Mutual and Bank of America as examples. “Washington Mutual, which everyone loves to hate, has $188 billion in deposits,” he says. “You can buy those deposits at the current market cap for just over $3 billion.”
As for Bank of America, “It has close to $800 billion in deposits, yet its market cap is only $110 billion,” Bove points out.
“These are great takeover targets,” he says. “By the end of the summer, you will see bank acquisitions flying. Everything below the top 3 — Citigroup, JPMorgan, and Bank of America — is now up for sale.”
Bove sees this merger mania coming while mergers and acquisitions sag in other industries. The value of M&A activity sank by nearly a third in the first half of 2008 from the same period of last year, to $1.86 trillion, according to preliminary figures from Dealogic.
And what are some of the prime takeover targets? Bove cites SunTrust, despite the fact that “management has said publicly that I’m wrong”; Washington Mutual, “because of its weak capital”; and Regions Financial, “which is incredibly cheap.”
Meanwhile, Wachovia already is “talking to three or four companies,” he says.
As buyers, Bove lists Toronto Dominion, Royal Bank of Canada, and HSBC. In addition, “I’m convinced JPMorgan will buy something by the end of the year, and I also think Wells Fargo will get into the fray.”
The main obstacle to mergers now is tangible common equity requirements, Bove says. “If you buy a bank and pick up a lot of intangibles, then the government will say your common equity is too low and require you to bring in more capital.”
But he thinks that problem will be solved by the end of the summer. “And then I think bank acquisitions will explode,” Bove says.
The Federal Reserve has proposed easing rules that make it difficult for non-banking companies to invest in banks. “I think that would attract a great deal of money into the industry,” Bove says.
The only worry resulting from such a change is that commercial companies could take control of banks, he says. “But that’s always been a worry.”
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