Continued: Lehman's loss, Wells' gain?

Ashes on Wall Street could make fertile soil for the likes of U.S. Bancorp, Wells Fargo and other traditional banks with a big presence in Minnesota.

Investors -- and the analysts who offer them advice -- have sent up the shares of many banks far from the scorched earth of lower Manhattan.

The stock market is betting that one bank's loss can be another's gain, with customers and employees of troubled banks up for grabs. Banks able to snare customer deposits at a low cost also may see their profit margins fatten as the spread widens between the cost of acquiring money and lending money.

To be sure, borrowers will find credit more costly and harder to come by in the months ahead, slowing economic growth and raising barriers to creating or expanding businesses. Few experts foresee improvement in the job market until next year.

"U.S. Bancorp and Wells are well positioned to not only weather the storm but come out of the cycle better off," said David George, an analyst at the New York City office of brokerage firm Robert W. Baird.

U.S. Bancorp and Wells Fargo, the two biggest players in Minnesota banking, each have return on assets, net interest margins and return on equity that shine compared with peer banks.

"As clients cast about for new lenders and thousands of unemployed bankers look for new jobs, Minnesota banks may end up acquiring many of both," said Terry McEvoy at Oppenheimer & Co. in New York.

In a speech earlier this week, Wells Fargo Chairman Richard Kovacevich confirmed interest in exploiting acquisition opportunities amid the cascading wreckage in the banking and insurance business.

"Wells Fargo often buys fixer-uppers," Kovacevich said Wednesday in a speech at the Association of Corporate Growth 2008 conference in Beverly Hills. "Given the financial conditions today I feel like a kid in a candy store.

"There is a lot out there today," he said.

That was no surprise to analysts such as George.

"U.S. Bancorp and Wells will come out of this with an upgraded customer base and employee base," he said. "People like to deal with winners."

The balance sheets of U.S. corporations as a whole, including many with headquarters in the Twin Cities area, are healthier than they've been in years. Corporate America was sitting on $14 trillion in cash in the second quarter, according to Federal Reserve flow of funds statistics. That's an 18 percent gain since 2002, after adjusting for inflation. Meanwhile, corporate debt over the same period rose only 8 percent.

That means many companies will be able take advantage of strategic opportunities.

"Clearly, the need to borrow is not that high," said Nariman Behravesh, chief economist at Global Insight, a leading economic forecasting firm based near Boston. "As a result, the corporate sector is somewhat insulated from this financial crunch that seems to be going on."

While regional banks have not been immune from a banking crisis that has the central bank and the U.S. Treasury pumping tens of billions of dollars into the financial system, their exposure to bad credit has been modest compared with money-center banks.

"We're at the height of the crisis now and I expect things to dissipate," said Mickey Levy, chief economist at Bank of America. "I don't think the contagion will spread to a wide array of other banks."

Richard Bove, bank analyst at Ladenberg Thalmann, wrote last week in a newsletter to investors that Wells Fargo might find itself in even stronger position based on the developments in the capital markets."

In Bove's view, "While loan losses are well above comfortable levels in some of the bank's portfolios, the opportunities to grow the business are offsetting the problems."

Wells Fargo, he wrote, "will benefit from the Lehman Brothers bankruptcy." Bove quoted John Stumpf, Wells Fargo's chief executive, who spoke at a conference in New York earlier this month.

Prospective Wells Fargo investors, Stumpf said, should consider "the benefits of the credit crisis" including fatter profit margins for banks that pay less for deposits and reap more from making loans. In addition, he said Wells Fargo expects to gain market share and make acquisitions -- largely offsetting the cost of purging their bad loans.

Nevertheless, some are skeptical that the financial crisis in world money centers can be contained.

"Even though local banks may do modestly better, in the short term, it's going to cause the economy to struggle," said Minnesota state economist Tom Stinson.

Regional banks indeed may gain market share, Stinson conceded. "It's always great to get a bigger piece of the pie," he said. "But when the pie is shrinking you may not see much of a gain."

Scott Anderson, senior economist at the Minneapolis office of Wells Fargo, draws a distinction between brighter prospects for regional banks and the consequences of financial market chaos for the broader economy.

"What happens in Vegas doesn't stay in Vegas," Anderson said. "What happens on Wall Street today is going to affect Main Street six months from now."

The U.S. Treasury and the Federal Reserve are pumping money into the financial system at an unprecedented rate. That may mean more inflation ahead in a period of slow economic growth, Anderson said.

"That's borrowing money, and it means printing more money," he said. "It's a pretty dangerous path to head down."

But as for Wells Fargo, despite the continuing cloud of home mortgage write-downs and rising loss reserves, the future looks less glum, in Anderson's view.

"We just surpassed Citigroup in market cap," he said, noting that the market value of all outstanding shares is greater for Wells Fargo than for Citigroup.

"It's like an out-of-control wildfire going on on Wall Street," Anderson said. But, he added, "The level of damage depends on the prevailing winds."

This report contains information from American Banker.

Mike Meyers • 612-673-1746