Jones Lang LaSalle
Citigroup, Chase pressured to deal
Banks slip after Wachovia merger; vying for WaMu
By Tom Fredrickson
Published on May 15, 2006
Last week's announcement of Wachovia Corp.'s planned $24 billion acquisition of Golden West Financial Corp. is ratcheting up pressure on Citigroup Inc. and J.P. Morgan Chase Inc. to respond with major acquisitions of their own.
The two big New York banks are under the gun as Wachovia, which already ranks as the nation's second-largest bank in terms of branches, will significantly widen its lead over fourth-ranked Chase and lowly, ninth-ranked Citibank. More important, the purchase of the big California bank moves North Carolina-based Wachovia a huge step closer to becoming a truly national player, a goal that Citibank and Chase have yet to achieve.
Speculation is mounting that Citi will move first by targeting Washington Mutual, the proud owner of the nation's fifth-largest branch network. The deal is "too logical not to happen," says Dick Bove, an analyst with Punk Ziegel & Co.
The scope of Wachovia's challenge to the two New York banks is clear. By buying Golden West, Wachovia's branch total will jump to 3,400, well ahead of Chase's 2,900 domestic branches and Citibank's 900, according to SNL Financial. No. 1 Bank of America boasts 5,600 branches.
Source of inexpensive funds
Branches have become increasingly hot commodities for bankers in an era of rising interest rates, because they provide access to steady, inexpensive funds.
"Ideally, banks would fund everything with deposits, because they're cheap," says Craig Woker, an analyst for Morningstar Inc. "Banks are borrowing money at less cost than the federal government can borrow money."
Growing deposits is something that has challenged Citibank. Its noninterest checking deposits, totaling $39 billion, have stagnated in the last year. To attract more retail funds, the bank has had to offer high-interest CDs and new high-rate Internet accounts. Citi's retail branch profits dropped 11%, adjusted for extraordinary changes, in the first quarter of 2006 compared with the same period in 2005.
While Citi has done far better overseas at sucking in more deposits, analysts say the bank has a limited ability to translate foreign deposits into loans in the United States.
With a domestic deposit base that is twice Citibank's, Chase is in a better position. The problem for Chase is the glaring absence of any branches in the vast West Coast market and in California in particular. Snapping up Washington Mutual would solve that problem in a hurry. Six hundred of WaMu's 2,000 branches are in the Golden State. That puts it in second place in terms of market share there, behind Bank of America, but far ahead of Wachovia's intended target, Golden West, which has 140 California branches--enough to rank sixth.
Buying WaMu would make even more sense for Citi, because it would make Citi a truly national player in retail banking as well as a force to be reckoned with in California, where it already has about 370 branches thanks to its 2002 acquisitions of California Federal and Golden State Bancorp. Adding WaMu would overnight give Citi 2,900 branches nationally and would put it in a dead heat with the mighty Bank of America in California.
"Any bank that has national aspirations has to come into California," says Frederick Cannon, an analyst with Keefe Bruyette & Woods Inc., who notes that WaMu provides the only obvious way to gain critical mass in California for either of the New York banks.
The hard part is swallowing such a massive business. Despite the recent cooling in the mortgage business, WaMu's principal moneymaker, the bank's stock has risen more than 5% in the last year. Citigroup or J.P. Morgan Chase would probably have to pay on the order of $55 a share for WaMu, or a cool $53 billion.
Price isn't too high
Still, it's a price that both New York banks would probably be willing to pay. If not, they risk getting eclipsed in California by Wachovia, or by a foreign bank such as HSBC, which is eager to expand its U.S. retail bank.
Wachovia's acquisition of Golden West, says Mr. Bove, means "a whole bunch of acquirers are going to come out of the woodwork."
One thing is certain. Even at $53 billion, WaMu is still manageable for Citi and J.P. Morgan Chase. Citi, for example, is an institution with $1.6 trillion in assets. In fact, as measured by market capitalization, WaMu is far smaller relative to Citigroup than Golden West is to Wachovia.
Comments? TFredrickson@crain.com
Citigroup, Chase pressured to deal
Banks slip after Wachovia merger; vying for WaMu
By Tom Fredrickson
Published on May 15, 2006
Last week's announcement of Wachovia Corp.'s planned $24 billion acquisition of Golden West Financial Corp. is ratcheting up pressure on Citigroup Inc. and J.P. Morgan Chase Inc. to respond with major acquisitions of their own.
The two big New York banks are under the gun as Wachovia, which already ranks as the nation's second-largest bank in terms of branches, will significantly widen its lead over fourth-ranked Chase and lowly, ninth-ranked Citibank. More important, the purchase of the big California bank moves North Carolina-based Wachovia a huge step closer to becoming a truly national player, a goal that Citibank and Chase have yet to achieve.
Speculation is mounting that Citi will move first by targeting Washington Mutual, the proud owner of the nation's fifth-largest branch network. The deal is "too logical not to happen," says Dick Bove, an analyst with Punk Ziegel & Co.
The scope of Wachovia's challenge to the two New York banks is clear. By buying Golden West, Wachovia's branch total will jump to 3,400, well ahead of Chase's 2,900 domestic branches and Citibank's 900, according to SNL Financial. No. 1 Bank of America boasts 5,600 branches.
Source of inexpensive funds
Branches have become increasingly hot commodities for bankers in an era of rising interest rates, because they provide access to steady, inexpensive funds.
"Ideally, banks would fund everything with deposits, because they're cheap," says Craig Woker, an analyst for Morningstar Inc. "Banks are borrowing money at less cost than the federal government can borrow money."
Growing deposits is something that has challenged Citibank. Its noninterest checking deposits, totaling $39 billion, have stagnated in the last year. To attract more retail funds, the bank has had to offer high-interest CDs and new high-rate Internet accounts. Citi's retail branch profits dropped 11%, adjusted for extraordinary changes, in the first quarter of 2006 compared with the same period in 2005.
While Citi has done far better overseas at sucking in more deposits, analysts say the bank has a limited ability to translate foreign deposits into loans in the United States.
With a domestic deposit base that is twice Citibank's, Chase is in a better position. The problem for Chase is the glaring absence of any branches in the vast West Coast market and in California in particular. Snapping up Washington Mutual would solve that problem in a hurry. Six hundred of WaMu's 2,000 branches are in the Golden State. That puts it in second place in terms of market share there, behind Bank of America, but far ahead of Wachovia's intended target, Golden West, which has 140 California branches--enough to rank sixth.
Buying WaMu would make even more sense for Citi, because it would make Citi a truly national player in retail banking as well as a force to be reckoned with in California, where it already has about 370 branches thanks to its 2002 acquisitions of California Federal and Golden State Bancorp. Adding WaMu would overnight give Citi 2,900 branches nationally and would put it in a dead heat with the mighty Bank of America in California.
"Any bank that has national aspirations has to come into California," says Frederick Cannon, an analyst with Keefe Bruyette & Woods Inc., who notes that WaMu provides the only obvious way to gain critical mass in California for either of the New York banks.
The hard part is swallowing such a massive business. Despite the recent cooling in the mortgage business, WaMu's principal moneymaker, the bank's stock has risen more than 5% in the last year. Citigroup or J.P. Morgan Chase would probably have to pay on the order of $55 a share for WaMu, or a cool $53 billion.
Price isn't too high
Still, it's a price that both New York banks would probably be willing to pay. If not, they risk getting eclipsed in California by Wachovia, or by a foreign bank such as HSBC, which is eager to expand its U.S. retail bank.
Wachovia's acquisition of Golden West, says Mr. Bove, means "a whole bunch of acquirers are going to come out of the woodwork."
One thing is certain. Even at $53 billion, WaMu is still manageable for Citi and J.P. Morgan Chase. Citi, for example, is an institution with $1.6 trillion in assets. In fact, as measured by market capitalization, WaMu is far smaller relative to Citigroup than Golden West is to Wachovia.
Comments? TFredrickson@crain.com
posted by Jones Lang LaSalle NJ News Blog at 10:37 AM
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