Bank mergers may mean higher fees
Availability of loans remains a concern
NEW YORK — The sale of Wachovia’s deposits and other assets to Citigroup on Monday leaves the nation with three superbanks, reshaping the U. S. banking landscape in the midst of unprecedented financial upheaval.
For customers of those institutions — Bank of America, Citigroup and JPMorgan Chase — the consolidation may result in higher fees on everything from checking accounts to bounced checks and overdrafts, and lower interest-rate yields on deposit accounts, banking experts said.
Loan availability also remains in question in the near term, particularly after the defeat of the government’s proposed financial bailout plan.
“The larger the bank is, theoretically the more power they have to set pricing and other policies,” said Nancy Atkinson, senior analyst at Aite Group, a financial services research firm. “I expect we’ll start to see free checking accounts start to disappear, and rates on overdrafts could go up. Savings rates could drop.”
But the news isn’t all bad. Atkinson and others are convinced that the approximately 8,500 remaining regional and community banks nationwide will continue to play a role, providing consumers with more options.
“If you are a customer of the Big Three, you’re probably going to see some increased fees because these banks have increased their market shares — dramatically in some instances,” said Tim Yeager, associate professor of finance at the University of Arkansas and a former economist at the Federal Reserve Bank of St. Louis. “From the community bank point of view, I don’t think you’re going to see much change.”
Wachovia, headquartered in Charlotte, N. C., on Monday became the latest casualty of the widening global financial crisis after Citigroup agreed to buy its banking operations for about $2.16 billion in a deal brokered by federal regulators.
The deal greatly expands New York-based Citigroup’s retail franchise — giving it a total of more than 4,300 U. S. branches and $600 billion in deposits.
But it comes at a cost: Citigroup Inc. said it will slash its quarterly dividend in half to 16 cents. It also will dilute the value of existing shares by selling $10 billion in common stock to shore up its capital position. Citigroup shares closed down $2.40, or 11.9 percent, to $17.75 on Monday.
In addition to assuming $53 billion worth of debt, Citigroup will absorb up to $42 billion of losses from Wachovia’s $312 billion loan portfolio, with the Federal Deposit Insurance Corp. agreeing to cover any remaining losses. An estimate for that figure was not available. Citigroup also will issue $12 billion in preferred stock and warrants to the FDIC.
Charlotte, N. C.-based Bank of America made a significant acquisition this month, scooping up investment bank Merrill Lynch & Co. for $50 billion in stock.
Essentially, Citigroup, Bank of America and JPMorgan, which acquired the investment bank Bear Stearns Cos. in March, now own about a third of the banking market, said Anant Sundaram, professor of finance at the Tuck School of Business at Dartmouth College.
“That is a level of concentration that we have not seen in the banking industry,” he said.
Locally, bankers said they weren’t alarmed by the growing size of the three behemoths and what it would mean for competition.
“There are more than 8,000 banks in the United States today, so as long as everyone is on a level playing field, I don’t think that mergers of one or two or 10 makes that much difference,” said M&T Bank Corp. spokesman C. Michael Zabel.
Community banks in particular said they can benefit by distinguishing themselves through the more personal service and attention they say they can provide. And that’s something that still appeals to a lot of customers, especially small businesses.
“There are going to be a lot of people in the local Western New York market that don’t want to deal with the large banks,” said Orrin Tobbe, president and CEO of Waterford Village Bank. “They want to deal with the community banks. And I think it’s really good for us. We know our customers. I just am really encouraged by it.”
Indeed, Tobbe said, Waterford has already gotten “quite a few accounts from people who are nervous about big banks and which bank is going to be next.”
But they are concerned about the safety issues posed by creating increasingly large banks. “They concentrate the risk of stupid lending and/or investment decisions,” said Peter Forrestel, CEO of Bank of Akron.
“These guys are going to be too big, perhaps,” agreed David Nasca, CEO of Evans Bancorp in Angola. “Haven’t we already seen with AIG what happens if you’re too big?”
“Is our country really being served by having a very small number of banks control a huge and growing percentage of the banking assets in this country?” asked Salvatore Marranca, CEO of Cattaraugus County Bank in Little Valley. “Can the regulators really understand, control and regulate such mega-me-ga’s? History says this is not a given.”
And once again, local bankers find themselves responding to customer questions and concerns about the safety and stability of Western New York’s financial institutions.
“We’re communicating with our customers as much as possible,” Zabel said. “We’re telling them that M&T remains strong and stable, and explaining why.”
“I think the average customer that we have seen is confident in our company, in our strength,” Nasca said. “And if anything, they’re happy that we haven’t been involved.”
Now that a deal for Wachovia is complete, the most troubled of the nation’s largest financial institutions have been dealt with. However, the FDIC estimated there were 117 banks and thrifts in trouble during the second quarter, the most since 2003, and probably more during the third quarter.
News Business Reporter Jonathan Epstein contributed to this report.
