Wall Street is looking forward for higher-priced deals considering the current competitive environment faced by bank lenders.
Three recent bank acquisitions have emphasized that banking sector is quite active & growing. However, market reaction for these deals highlights that Wall Street is indeed looking forward for higher-priced deals considering the current competitive environment faced by bank lenders.
Wachovia Corporation, ranked 4th among US banks, announced the completion of Golden West Financial Corporation, 2nd largest savings & loan form in US, in a deal worth US$ 24 Billion. Main hurdle to the acquisition was overcome when Federal Reserve in US approved it giving Wachovia 285 additional branches in West USA.
David Hilder, an analyst at Bear Stearns, warned of operational challenges that may come in the way of Wachovia to transform Golden West Corporation's branch system as stock is currently declining due to risks over option adjustable rate mortgages (ARM). Shares of Wachovia are down by about 6% from the level when the acquisition was announced in May 2006.
In another deal, Washington Mutual announced the completion of acquisition Commercial Capital Bancorp, Inc. in cash transaction accounting to around US$ 983 Million.
The deal has received a better response from Wall Street. Washington Mutual's stock saw an increase of 4.3% from April to July and declined in August, due to concerns over exposure of banks to housing market & limiting profit margins.
JP Morgan Chase also completed acquisition of three Bank of New York owned business groups, therefore, allowing it to form a network consisting of 750 branches in Connecticut, New York & New Jersey. JP Morgan has paid US$ 150 Million for acquiring the three groups.
The deal appears to have probably been inspired through investment banking, though it's difficult to predict its influence on stock price of JP Morgan. However, Wall Street doesn't look much puzzled by the firm's overall strategy. Stock has seen a 21% rise since the beginning of 2006.
With slowing growth of loans & inverted yield curve, banks are strategically looking to increase deposits for collecting more fees.
Jim Callahan, a MorningStar analyst, said that acquisition of new deposits is becoming more competitive & challenging in existing marketplace. Therefore, making deposits a better alternative for acquisitions. Long-term consolidation, however, remains in place. He predicts more deals in shorter term as banks discover increasing challenges ahead of them in gathering deposits.
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