-- The unrelenting financial crisis is pounding U.S. commercial banks, transforming the industry landscape and likely leading to a rising wave of bank mergers and fire sales in the coming months.
A clear harbinger of the turbulent times ahead for retail banks came last week, when Wells Fargo wfc beat rival banking titan Citigroup c to win over troubled Wachovia in a stock-swap deal brokered by the Federal Reserve that's now valued at about $12 billion.
Also sure to shake up the industry is the Treasury Department's sweeping plan to buy billions of dollars of stock in ailing financial firms. The move will give banks badly needed cash, while aiming to free up credit for consumers and businesses.
"We've never seen such uncertainty over the economy and the banking and brokerage industries," says Michael Flanagan, an independent brokerage analyst at Securities Industry Analytics in Philadelphia.
Federal Deposit Insurance Corp. numbers tell a stark story:
•Fifteen banks, led by Washington Mutual, have failed this year, and the FDIC has added 117 banks to its problem list, including banks facing severe threats to their financial viability.
•Total second-quarter assets of the 8,451 U.S. banks and savings-and-loans fell by $69 billion — the largest quarterly drop since 1991.
•Bank loan charge-offs in the second quarter hit $26 billion — triple the same period in 2007.
Despite the turmoil, a flood of banking mergers and asset sales is anticipated soon, as the value of U.S. bank stocks has plummeted in recent months, say analysts such as Bart Narter at Celent, a financial services consulting firm.
Already, foreign banks are hunting for good deals. Potential acquirers include Toronto-Dominion Bank in Toronto, HSBC in London, Royal Bank of Scotland in Edinburgh and Banco Santander in Madrid. All have bought U.S. banks in recent years, and Banco Santander reportedly was an avid suitor of Wachovia. "The U.S. banking industry is up for sale, and it's a Kmart blue-light special," says analyst Robert Patten at Morgan Keegan. "A lot of stronger banks are looking very closely at a lot of weaker banks."
The merger frenzy is likely to strengthen large U.S. "money center" banks that already wield plenty of financial firepower. The Wells Fargo-Wachovia deal will create a superbank — boasting $1.4 trillion in assets and 48 million customers — that will rival Bank of Americabac, JPMorgan Chase jpm and Citigroup.
At the same time, thousands of small local banks, blessed with niche markets and loyal customers, will keep thriving.
"There will be a few very large institutions, many smaller community banks — and virtually nothing in the middle," says Nancy Bush of NAB Research, an investment advisory firm.
The entry into commercial banking by Wall Street giants Goldman Sachs gs and Morgan Stanley ms also will rock the industry. With the Federal Reserve last month allowing them to operate as bank holding companies, Goldman Sachs and Morgan Stanley — each boasting $1 trillion in assets — can seek stable, federally insured deposits from customers.
That poses a huge competitive threat to commercial banks, especially if the Wall Street firms buy retail banks to bolster their presence on Main Street.
Retail bank branches haul in 60% to 80% of commercial bank revenue, Narter says. Even with the growth of investment firms and online banking in recent decades, bank branches remain the best way to draw new deposits and build customer loyalty.
Amid the upheaval in banking, consumers should win in the short run. Big banks, fiercely competing for millions of consumers and business clients, are likely to lower prices on products and services. But with less competition and fewer choices for consumers, prices will rise in the long haul, Flanagan predicts.
Barring an economic rebound, consumers, homeowners and businesses in the coming months also won't find it easy to land loans and tap credit lines from cautious banks.
And if credit stays frozen, banks are likely to get more visits from regulators seeking to free up cash and capital. The FDIC, as it did with Wachovia, is pressuring more troubled banks to find prudent, well-run merger partners, Bush says.
"There has to be dramatic and fundamental change in the banking industry," she says. "We can't let this happen again."