The next boom in financial consolidation may be led by the Minneapolis-based bank, which avoided major acquisitions as other huge banks ballooned.
Historically, Richard Davis has not been the acquisitive type.
Since Davis took the helm of U.S. Bancorp in 2007, the Minneapolis-based bank has acquired four small banks and thrifts with combined assets of $35 billion -- far less than some of his big-bank counterparts. Davis avoided a major deal while Bank of America, J.P. Morgan Chase, Wells Fargo & Co. and Pittsburgh-based PNC Financial Services all made headline-grabbing acquisitions that, in some cases, enabled them to double in size.
Yet even Davis, a CEO known for his caution, seems to be warming to the idea of a larger transaction. At a conference last week, Davis promised investors he would not miss an opportunity to do a deal if a good one came along. "If it's small or big, if it's bank or payments or trust, we will not miss a single opportunity," he declared.
Though Davis later tempered his remarks, saying he would "be just fine" if U.S. Bancorp did not do a major deal, his comments set off speculation that a large transaction might happen by year's end. Wall Street analysts rattled off a long list of banks with depressed market values that would make for likely takeover targets. They include SunTrust Banks Inc. of Atlanta, Regions Financial Corp. of Birmingham, Ala., KeyCorp of Cleveland, Fifth Third Bancorp of Cincinnati and Zions Bancorp of Salt Lake City.
Even before Davis' statements, U.S. Bancorp was widely seen as likely to lead the next boom in bank mergers and acquisitions. Many smaller regional banks are struggling with excess lending capacity, depressed stock prices and loan portfolios that still face rising losses. In addition, tougher regulations may require them to hold more capital.
Many banks may prefer to sell to a larger, stronger rival. And U.S. Bancorp is one of the few large banks in a position to buy, analysts said. Unlike many regional-bank rivals, which are handicapped by losses on old, risky loans, U.S. Bancorp emerged from the credit crunch with a war chest of capital from profits.
U.S. Bancorp's equity, or the stock it can use to pursue deals, grew during the economic downturn. The bank ended the second quarter with $28.9 billion in total equity, up 28 percent from $22.6 billion at the same point two years earlier.
"There are a lot of injured banks that are crippled that need someone to come in and rescue them," said Jaime Peters, a bank analyst at Morningstar. "U.S. Bancorp has a clean balance sheet, they're generating massive amounts of capital, and they've indicated a willingness to buy. It all adds up."
U.S. Bancorp does not have to worry about bidding against its bigger rivals. Bank of America Corp., J.P. Morgan Chase and Wells Fargo each has about 10 percent or more of U.S. deposits, which is the most permitted by regulators when considering takeovers, and Citigroup is trying to sell assets. They also are preoccupied with digesting their own deals, made at the peak of the credit crisis, analysts say.
"U.S. Bancorp is not sitting and waiting for someone to knock on their door," said Richard Bove, an analyst at Rochdale Securities in Florida. "In my view, they likely are having ongoing conversations with 10 to 15 banks right now."
U.S. Bancorp has shown it's willing to do deals. Over the past two years, the bank has quietly acquired a savings and loan in California with assets of $16.5 billion, a multi-bank holding company in Illinois with $18 billion in assets, three credit card portfolios from Citigroup, $225 million in deposits in Idaho from a failed bank, and a mutual fund administration business with $8 billion in assets under administration. About two-thirds of the bank's loan growth over the past three years has come from acquisitions, rather than organic growth, the bank said.
Even so, the bank has not pulled off the giant deals of its rivals. In 2008, PNC Financial Services doubled in size with its acquisition of National City Bank of Cleveland. BB&T Corp., a Winston-Salem, N.C.-based regional bank, expanded dramatically with its purchase of failed Colonial Bank of Montgomery, Ala. Meanwhile, Wells Fargo acquired Wachovia; Bank of America snatched up Countrywide and Merrill Lynch; and J.P. Morgan bought Washington Mutual and Bear Stearns.
"It's time for U.S. Bancorp to step up," said Tony Plath, a finance professor at the University of North Carolina at Charlotte. "They've got a strong balance sheet, plenty of liquidity, a good management team and the ability to do a deal. It's unclear what they are waiting for."
Overall, bank merger and acquisition activity has fallen off dramatically since before the economic downturn began. There were 119 bank and thrift deals in 2009, down from 296 in 2006, according to SNL Financial of Charlottesville, Va.
Many analysts expect consolidation among many of the smaller, regional banks will create a barbell-shaped banking system -- with lots of small, community banks and just a few megabanks, and not much in between.
At the investor conference, Davis made it clear that he won't rush into a deal. "We won't let M&A be a lost opportunity if the right opportunity were to come along," he said. "But it's not core to our strategy. ... We'll be just fine if we never do another large M&A in the life of this management team."
Chris Serres • 612-673-4308