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Running of the Bulls
Connecticut banking in the '90s:
The rich get richer (and more diversified), and the weak get eaten
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Business New Haven
5/4/1999
By: Alec Appelbaum
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Banks large and small are combining and reconfiguring themselves as they battle for market share. The interstate lenders that swept through the area in the mid-1990s are dabbling in brokerage and global management, while the midsize regionals that survived the takeover wave are building their own asset bases. So far, all combatants seem to be winning.
“For the remaining institutions in Connecticut, times are good,” says John Carusone of Hartford's Bank Analysis Center, which assembles deals for small New England fiduciaries. “Profitability and capital adequacy are at all-time highs, non-performing assets are at all time lows.”
This surge comes with a conspicuous winnowing of the field. According to the state's Department of Banking, Connecticut held 68 state-chartered and 20 national or federal lending institutions in 1997. That's a 27.7-percent drop from comparable totals in 1996 and a 49.6-percent drop from the 1991 tally. Among state-chartered banks, the shrinkage is 20.6 percent and 41.4 percent, respectively. Individual bank value, though, has increased.
“The fact that the economy has turned around, with an overbanked competitive environment and the sex appeal on the P/E ratios of some bank stocks, means that mergers and acquisitions are expected to continue through the balance of the decade,” Carusone says.
As it does, midsize banks get bigger. The two biggest in-state charters - People's Bank of Bridgeport and Webster Bank of Waterbury - had $8.2 billion and $6.9 billion in assets, respectively, at the end of last year. Webster picked up $1.2 billion from acquiring Bristol's Eagle Financial this April; People's bought Norwich Savings' $713 million in December. Absorbing these mergers, People's now has $9.7 billion in assets; Webster has $8.9 billion.
Across the spectrum, Carusone says, banks are combining on opportunistic terms. “The average takeover multiples are about 250 percent of corporate value, and 21 times earnings, which is about a 20-percent jump over last year.”
Providence's Citizens Bank started the local run when it bought the $342 million Bank of New Haven for $57.2 million in September. December 9 saw Long Island's North Fork Bancorporation snatch the five-branch Branford Savings Bank, with its $180 million in assets, in a stock swap worth roughly $800 million.
More recently, the Mahwah, N.J.-based Hubco bought Wallingford's Dime Savings' $961 million in assets for $201 million in stock on March 31. Carusone expects four to six more banks to disappear before the year 2000.
Carusone's firm sold the $150 million Bank of South Windsor to New England Community Bank for $34 million this spring; he says community bank boards are merging in a spirit of realism rather than one of greed. By “taking a paycheck on behalf of shareholders,” he says, community banks recognize that only those banks with technological and managerial depth can survive when the economy sags.
Carusone says consolidation has not wrought the kind of speculation that undid Connecticut lenders in the early 1990s. “The same banks are chasing after a smaller supply of worthwhile loans to underwrite,” he says. “The competitive environment is ferocious.”
When competition gets ferocious, customers often benefit. Around New Haven, banks are trying to differentiate themselves by reaching customers where they work, shop and even surf.
The Bank of New Haven, which Citizens Bank bought last year, advertises its new corporate identity by stressing its officers' willingness to visit businesses or meet on weekends. BankBoston plans to open five branches inside Shaw's supermarkets this year, following People's lead in partnering with the Stop & Shop chain.
Fleet has converted more than a third of its in-state branches to “Business Solutions Centers,” where staff can process loans and provide retirement-plan advice. Webster now offers instant online mortgage evaluation, blending scoring software from FannieMae and GE Capital, and all players except New Haven Savings Bank and the Bank of New Haven offer online banking software. First Union lets customers choose from a suite of software options.
Today's disks are not meaningfully different from yesterday's toasters. With Connecticut still atop the nation in per-capita income, stunts to lure customers are nothing new. But today's banks are radically different from their forebears in their interface with customers and their emphasis on asset management and technology.
“Trends in technology favor smaller-sized institutions,” says Carusone “As price declines, physical size is miniaturized and user-friendliness is enhanced, technology is no longer a barrier.”
As interactive commerce ascends, traditional bank branches recede. Fleet leads New Haven banks with seven branches within the city limits. People's now operates a third of its branches in supermarkets.
But this contraction in traditional branch networks does not mean a reduction in services. Through supermarkets, affiliates and Web sites, all substantial banks are trying to win customers' business and fees in deeper ways.
As the baby boomers invest more intensely and the stock market cooks, large banks around the nation are adding brokerage and asset management to their wardrobes. BankBoston is building a $40 million regional headquarters in Buenos Aires and in early April hired away a marketer from Brazil's Banco Paribas to sell derivatives in Latin America.
The homegrown Bank of New Haven is now an international property, since the Royal Bank of Scotland owns 76.5 percent of Citizens Bank and the Bank of Ireland owns the rest. Fleet may tie up with an international asset manager in the next few months, but for now its main forays are into cyberspace, where it helps entrepreneurs set up their own Web pages for a fee and offers shares in Galaxy Funds, a Web-only mutual fund family.
In this climate, banks swallow small asset managers and retail brokerages as well as smaller banks. Fleet bought New York's Quick & Reilly for $1.6 billion in September; First Union bolstered its securities arsenal with two major acquisitions over the past year.
In September it bought Wheat First Butcher Singer, a full-service investment house based in Richmond, for $471 million. This March, it added discount brokerage the Money Store for $2.1 billion.
Hardly any large bank ignores the fees and loyalty that brokerage services can bring. Carusone attributes their current importance in banking to the whims of another group of stakeholders.
“The integration among brokerage, insurance and banks is beginning to be felt even among institutions of smaller size,” Carusone observes. “We have a bank that wants to buy an insurance agency, a trust company that would like to be acquired. Why? Shareholders are demanding higher levels of value all the time. To keep them happy, banks are getting involved in allied lines of business.”
To Carusone, the amalgamation of financial services under bank umbrellas is “definitely about increasing performance, and shareholder-driven.”
In a torrid stock market and a public-policy climate ripe for financial modernization, banks compete beyond their traditional domain of deposits and loans. At the same time, weak deposits and loans can lead banks to divest chunks of prior investments, as Fleet did when it sold 31 Maine branches this spring.
Similar sell-offs could occur as Connecticut's economy changes or its community banks continue to grow.
The buzz of expansion and combination gives no signal of quieting down. Shares of Advest, a Hartford asset manager, surged April 9 on rumors that a regional bank would soon buy it. Carusone's expected “net loss of two or three institutions per year” might unveil a larger and more ambitious banking industry than Connecticut has ever seen.
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