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Business Costs & Regulation

More Bank Mergers Mean Fewer Consumer Choices

Banks looking to expand can find good deals in competitors that aren’t growing as quickly.

Bank mergers will be on the rise through the end of this year and all of 2011, as banks look for growth opportunities beyond their current customer bases. As many as one-fifth of the nation’s 8,000 banks could be gone in the next few years -- some failing institutions closed or sold with the help of the Federal Deposit Insurance Corporation and others bought for their geographical or business line opportunities.

Contributing to the trend: new regulations and capital requirements. As specifics of the financial reform bill are worked out, the just-created BB&T in Winston-Salem, N.C., in a July conference call with analysts. “I mean, what the crisis has done is, it's revealed some of the fundamental flaws in the strategies and execution abilities of institutions.”

Good deals abound for banks seeking to grow, but mergers means less competition for most banking customers -- and with it, less innovative products, lower rates on savings and slower roll-outs of features like mobile banking. Usually within three years of acquisitions, local competition for loans declines, interest rates for loans rise and borrowers get smaller loans.

Which banks will disappear? Banks such as Capital One Financial, SunTrust and Fifth Third may be targeted for takeovers, as the stock market devalued these and other medium-size banks this summer. Possible takeover candidates are those whose book values currently exceed market values. Increased earnings in the second quarter pushed the book value of many banks higher. Meanwhile, the stock market has not been impressed by earnings, keeping the price of banks lower.

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The buyers won’t be the biggest banks -- firms such as Wells Fargo and Bank of America have already reached their legal limit on deposit size. Law prohibits banks from exceeding 10% of the nation’s total deposits with an acquisition.

Instead, those looking for deals include banks with strong capital levels, steady earnings and fewer losses from bad loans than in recent years. Examples: Northern Trust, PNC Bank, U.S. Bancorp and Bank of New York Mellon. Foreign banks trying to expand in the U.S. will also be on the lookout.

“I've got to believe there will be an acceleration of consolidation,” Rene Jones, chief financial officer at M&T Bank Corp. in Buffalo, told analysts after the bank reported second quarter earnings. M&T was reportedly in talks with Spain’s Banco Santander’s Sovereign Bank unit, but merger talks broke down in late September.