DEALTALK-JPMorgan seen hunting for bank deals

NEW YORK, July 22 Tue Jul 22, 2008 3:37pm EDT

NEW YORK, July 22 (Reuters) - JPMorgan Chase & Co (JPM.N) is one of a few U.S. banks strong enough to buy others, and some analysts suspect Chief Executive Jamie Dimon is on the prowl for deals but holding back for the right moment to pull the trigger.

Credit crunches usually spur strong banks to buy weak ones, to pick up assets on the cheap. JPMorgan would seem well positioned to acquire now.

There are obstacles to buying now, including accounting rules and the ever-weakening balance sheets of many targets, which gives potential buyers an incentive to wait. But many analysts think JPMorgan is at least looking at deals now.

JPMorgan declined to comment.

"I am pretty certain they are shopping," said Michael Nix, a principal at Greenwood Capital Associates, which has $750 million under management and owns JPMorgan shares. "The fact they haven't done anything yet suggests to me that they are not so sure we've seen the bottom."

On a recent conference call, Deutsche Bank analyst Mike Mayo asked Dimon, "You've been waiting your whole life for this environment ... so what is the impediment to you pursuing a merger right now in the retail banking side?"

"Nothing is impeding us," Dimon said. "But it's not just up to us."

Dimon has said in the past that JPMorgan would look to expand in Florida and California, and experts see several banks that could fit into JPMorgan's ambitions.

The list includes banks such as Washington Mutual Inc (WM.N) and Wachovia Corp WB.N that have a presence in the U.S. Southeast and the West Coast, experts said.

Other, somewhat smaller institutions like SunTrust Banks Inc (STI.N) and BB&T Corp (BBT.N) with a presence in the Southeast can help Dimon realize his Florida dreams, they said.

"If you've got the capital and the access to capital, why not do it when no one else can or when no one else wants it?" asked Cassandra Toroian, chief investment officer at Bell Rock Capital, which owns JPMorgan shares.

Washington Mutual, Wachovia, and SunTrust declined to comment. BB&T spokesman Bob Denham said, "We are committed as ever to remaining independent."

Toroian said Washington Mutual -- the largest U.S. savings and loan, now weighed down by mortgage losses -- would probably be at "the top of the list for JPMorgan."

OFFICIAL ENCOURAGEMENT?

JPMorgan offered to buy WaMu earlier this year, a person briefed on the matter previously told Reuters, but its $7 billion bid was spurned and the thrift instead opted for an infusion of that size from private equity firm TPG Capital LP [TPG.UL] and other investors.

JPMorgan, which in March agreed to buy Bear Stearns Cos with the encouragement of the U.S. government, may also have U.S. regulators counting on it to step up for a rescue again.

"I am sure the government is also talking to JPMorgan about potential purchases of problem banks," said Chip MacDonald, a partner at law firm Jones Day.

Even if JPMorgan was scouting for deals, a transaction is likely to take time.

"I have the feeling that JPMorgan is talking to lots of people," said MacDonald, who declined to discuss potential targets. "But I would be surprised if anything was imminent."

ACCOUNTING HURDLES

Under U.S. accounting rules, a company that acquires another must record the value of the target's assets and liabilities at their market value at the time of purchase.

For many banks in distress, marking assets and liabilities to market would leave them with a negative net worth, and buying such a bank cuts into the acquirer's capital. Most would-be buyers these days do not have loads of capital to spare.

Boards may also be reluctant to sell when stock prices are depressed. The KBW Bank Index .BKX, which includes 24 major bank stocks, is down roughly 44 percent since the beginning of July last year.

Those drops are good for potential buyers, said William Bates, a partner at law firm King & Spalding.

"It's some opportunity," Bates said. The difficulty is in getting completely comfortable with a bank's assets, and being sure write-downs won't overwhelm the benefits of any acquisition, he added. (Editing by Gary Hill)