Thursday, July 10, 2008

U.S. Bank Buys Stall on Housing Slump, Loan Defaults (Update1)

By Linda Shen

July 10 (Bloomberg) -- U.S. banks are merging at the slowest pace in at least 15 years as the mortgage-market collapse depletes capital and makes lenders wary of buying firms saddled with bad loans.

Banks announced 67 takeovers this year through June 13, valued at a total of $6.8 billion, data from KBW Inc. analyst Melissa Roberts show. Bank dealmaking is headed for its slowest year since at least 1993. The annual average is more than 300 deals.

``Why would you want to buy somebody else's problems when you're still trying to figure out what your own are?'' Robert Patten, a New York-based analyst for Morgan Keegan, said in an interview.

U.S. lenders have raised $120 billion after losses tied to housing, and may have to raise another $65 billion, Goldman Sachs Group Inc. analysts wrote in a note to investors in June. Banks, still discovering bad loans during the worst housing slump since the Great Depression, have left the merger and acquisition market ``dormant,'' the report said.

National City Corp. said in April it was raising $7 billion in cash, ending speculation it might be sold. Problem assets were ``so severe'' that National City would have been ``prohibitive'' for an acquirer, KBW Inc. analyst David Konrad said in an interview. National City instead worked with Corsair Capital LLC for a capital infusion.

U.S. foreclosure filings increased 53 percent in June from a year earlier, according to data released today by Irvine, California-based RealtyTrac Inc. One in every 501 households was in some stage of foreclosure. Nevada, California and Arizona had the highest rates.

Housing Prices

The Office of Thrift Supervision said in May savings and loans set aside a record $7.6 billion to cover bad loans, and home prices fell 15.3 percent in April from a year earlier, according to S&P/Case-Shiller. That's the steepest price decline since the group started collecting data.

``Banks don't know when the next guy is going to walk in and hand them the keys for a place,'' Patten said.

The banking industry averaged 308 deals a year from 1993 through 2007, data from Roberts show. The average value of deals fell 70 percent to $101.5 million in the first six months of 2008 from $329.3 million in the same period a year ago, according to Roberts' data.

Lenders selling themselves at this point may not be the most attractive acquisition candidates anyway, analysts say. A bank putting itself on the market now invites ``thinking that bank must be about to crumble,'' Sandler O'Neill & Partners LP analyst Kevin Fitzsimmons said.

`Degree of Desperation'

``If you're selling today, you're probably the weakest and have the least franchise value of what might come along later,'' Zions Bancorporation Chief Financial Officer Doyle Arnold said at a conference last month. Such banks ``probably have some degree of desperation.''

Bank of America Corp.'s $4 billion acquisition of Countrywide Financial Corp. was made after considering likely declines in home prices and risks from lawsuits, Chief Executive Officer Kenneth Lewis said April 23 at the company's annual meeting, where some investors asked him to call off the deal.

The mortgage broker's ``loan portfolio has deteriorated so rapidly that Countrywide currently has negative equity and the acquisition will be a drag on Bank of America's earnings,'' Friedman, Billings, Ramsey & Co. analyst Paul Miller said in a May report.


Some deals taking place are products of regulator pressure. PFF Bancorp Inc. sold itself to FBOP Corp.'s California National Bank for about $30.5 million and a loan to stay ``adequately capitalized'' according to regulator standards.

PFF, which has lost about 96 percent of its value in the past 12 months, was ``an attractive transaction for us from an economic standpoint,'' said California National Bank Chief Executive Officer Greg Mitchell.

``There's a hope and belief there could even be some recoveries'' among PFF's problem assets, Mitchell said.

There will be lenders that emerge in a better position than others to ``roll this stuff up,'' FTN Midwest Securities analyst Jeff Davis said. Banks such as Winston-Salem, North Carolina- based BB&T Corp. and New York-based JPMorgan Chase & Co. may emerge as ``winners,'' Davis said.

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