Originally created 01/16/04

Experts say consolidation in the banking industry isn't over



NEW YORK -- The megamerger of J.P. Morgan Chase & Co. and Bank One Corp. will likely shift the banking industry landscape, setting off a cascade of deals among mid-sized institutions while creating opportunities for community banks to steal customers away.

Once the J.P. Morgan-Bank One merger is completed later this year, the nation will have three behemoth banks: Citigroup, with $1.9 trillion in assets, the J.P. Morgan institution with $1.1 trillion and the Bank of America-FleetBoston combination with just under $1 trillion in assets.

"In the near term, it looks like we'll have three big banks - and everybody else," said John McCune, a banking expert at SNL Financial, an independent research firm in Charlottesville, Va.

J.P. Morgan announced late Wednesday that it was offering $58 billion in an all-stock deal to acquire Bank One, which has $290 billion in assets and 1,800 branches in 14 states. J.P. Morgan will keep its name and its New York headquarters.

The bank also gets a successor to 60-year-old chief executive William B. Harrison Jr., who agreed to give up that post in 2006 to Jamie Dimon, who was a Citigroup executive before his four-year stint as Bank One's CEO. Dimon will be president and chief operating officer in the interim.

The J.P. Morgan-Bank One merger, like the Bank of America-FleetBoston deal, awaits the approval of shareholders and bank regulators.

The rationale for the megamergers is that big banks have the heft to compete better internationally, offer a wider variety of financial services, cross-sell products to their customers and gain market share.

At the same time, the emergence of the superbanks is putting pressure on the mid-tier institutions to capture or be captured, analysts said.

Michael A. Plodwick of the Blaylock & Partners equity research team believes Wells Fargo & Co. of San Francisco and Wachovia Corp. of Winston-Salem, N.C. "will pursue strategic transactions as buyers." Both have assets of about $360 billion.

He adds that the PNC Financial Services Group in Pittsburgh, SunTrust Banks Inc. of Atlanta, U.S. Bancorp of Minneapolis, Minn., and Washington Mutual Inc. of Seattle "must now think long and hard about preserving their independence."

Jon Balkind, a banking analyst at Fox-Pitt Kelton, Inc., said one factor that could spur more deals is that Bank One agreed to be purchased by J.P. Morgan at a price just 14 percent above its stock value - considerably less than the 40 percent premium Bank of America had to promise to FleetBoston last October.

"If potential sellers were willing to sell for a lower premium, that could spur activity," Balkind said.

Community banks, meanwhile, should be able to benefit by picking up customers who don't want to be absorbed into bigger banks.

"Mergers like this always create opportunities for smaller institutions that provide more hands-on service," said Kenneth A. Guenther, president and chief executive of the Independent Community Bankers of America, a trade group in Washington, D.C. "This isn't a negative for community banks."

Still, Guenther worries about the increasing consolidation in the financial services industry.

"The size and the scope and the complexity of these super financial institutions makes effective regulation difficult," he said. "They can skirt the edges of the law to get something done, as happened with Enron. And the regulatory agencies are running to keep up."

He added that the megabanks also are "too big to fail," meaning that the government would have to intervene to bail out a troubled institution or risk widespread damage to the economy.

"I'm not sure that's what we want in a free market system," he said.

Still, there's little to suggest the merger trend will ebb. At J.P. Morgan, Harrison and Dimon are already looking ahead to possible future acquisitions.

"We're well-positioned if the right opportunity is there," Harrison told reporters. "If the right situation comes along, we'll look at it."

Sharon Haas, an analyst who specializes in U.S. banking at Fitch Ratings agency in New York, pointed out that in comparing the U.S. banking system to other major systems around the globe, "you'd be hard-pressed to find any other as fragmented."

In Canada, for example, the top five banking companies control 90 percent of the market, she said.

The United States, meanwhile, has 7,830 banks. But that's about half the number there were two decades ago, Haas said. And the 10 largest banks now control 62 percent of total bank assets, compared with 29 percent in 1984, she said.

In the United States, federal banking regulations prevent any single bank from controlling more than 10 percent of total deposits. The Bank of America-FleetBoston merger will hit that limit.