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Nimble Singles Could Have Last Laugh at Bank Dance

Analysts say independents that stay lean could be consolidation's winners.

Bank One



J.P. Morgan


aren't the only ones celebrating their new union: a host of regional banks are, too.

News that J.P. Morgan will acquire Chicago-based Bank One for $58 billion prompted another round of speculation Thursday about who else is ripe for takeover. Shares of

PNC Financial



U.S. Bancorp






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all gained ground, as analysts highlighted these companies as possible merger candidates.

But analysts said these banks, and others like them, will likely benefit from the acquisition wave, even if they remain independent.

"It is now open season on bank customers in many markets," said Chris Marinac, a senior research analyst at FIG Partners. "The compound earnings growth from winning incremental customers and business could be surprising."

Analysts note that big acquisitions typically lead to disruptions and customer defections, and they believe nimble players should be able to take advantage.

"While we believe this is a great deal for both companies involved, we also believe there may be some fallout and lost deposit and lending relationships," noted Jon Arfstrom, an analyst at RBC Capital Markets.

Arfstrom suggests that

Fifth Third



TCF Financial



WinTrust Financial


are possible beneficiaries. Investors didn't seem to agree on Thursday, sending shares of all three companies down slightly.

Raymond James analyst John Pandtle expects the acquisition trend to bypass Southeast banks during the next few quarters, because these companies have an "underlying growth advantage" relative to national peers and probably aren't interested in selling. "We are not surprised that so many of the region's larger players continue to follow the path of independence," he said.

Still, Pandtle believes that speculation about a possible acquisition could drive some of these stocks higher. He thinks SunTrust,






would be seen as the most attractive franchises.

SunTrust and SouthTrust rose 3% Thursday, while AmSouth was up 2.6%.

Bear Stearns analyst Salvatore DiMartino is more optimistic that deals will accelerate among regional banks this year, driven by a need "to increase revenues, round out their deposit franchises and remain competitive in a tougher operating environment."

Merrill Lynch analyst Rodrigo Quintanilla, meanwhile, is recommending larger, more differentiated banks such as US Bancorp,




Wells Fargo


, saying that merger speculation should overwhelm a "relatively lackluster fundamental outlook for 2004."

He believes J.P. Morgan's acquisition of Bank One will force large banks to reassess their long-term strategies, and he said these three firms offer attractive valuations. Wachovia was lower Thursday, while Wells Fargo rose a touch and US Bancorp added almost 3%.

Despite all this conjecture, Marinac thinks regional banks don't need to be acquired in order to stay relevant, and he says buying stocks on the hope that the companies will be taken over could well be "a recipe for underperformance."

"We suggest investors focus on proven winners who can pick the pockets of ONE and JPM," Marinac said. These include obvious beneficiaries such as Fifth Third,

Southwest Bank of Texas



Charter One


. Southwest and Charter One both gained more than 2%.

While it's still unclear who will win or lose this year from consolidation within the banking group, the J.P. Morgan/Bank One deal has the year off to a solid start. According to Thomson Financial, M&A volume in the U.S. now stands at $65.3 billion, the second-fastest pace on record at this stage of the year. In 2000, some $208.4 billion in deals had been announced by now, but volume has been anemic in more recent years.