Weak dollar could aid bank takeovers: KBW CEO

By Jonathan Stempel

NEW YORK (Reuters) - Merger activity among U.S. banks will likely remain slow at least until the middle of 2008 but may get a boost from foreign acquirers able to benefit from the weak U.S. dollar, the chief of investment bank Keefe, Bruyette & Woods' parent said on Monday.

John Duffy, who runs KBW Inc (KBW.N) and took it public last November, said worries about a slowing U.S. economy and rising consumer and business credit losses are holding back potential suitors. The summer's credit crunch has caused merger discussions to lessen "dramatically," he said.

"People are now concerned more about an economic slowdown and what the implications for credit and the credit quality of the target bank's balance sheet," Duffy said at the Reuters Finance Summit in New York. "Buyers have stepped away."

For non-U.S. buyers, the situation is different. The euro hovers near $1.45, compared with near parity with the greenback five years ago, while the Canadian dollar this year broke through parity for the first time since 1976.

Some European banks including HSBC Holdings Plc (HSBA.L) and UBS AG (UBSN.VX) have, like their U.S. counterparts, been distracted by consumer credit losses. Royal Bank of Scotland Group PLC (RBS.L), whose Citizens Financial unit is one of the largest U.S. banking franchises, has been focused on leading a buyout group for Dutch bank ABN AMRO Holding NV AAH.AS.

But Duffy said a weak dollar makes U.S. bank valuations look better to foreign buyers.

Earlier this year, Spain's BBVA Bilbao Vizcaya Argentaria SA (BBVA.MC) agreed to pay more than $9 billion for Compass Bancshares Inc. of Birmingham, Alabama.

KBW itself advised Canada's Toronto-Dominion Bank (TD.TO) on its pending $8.5 billion purchase of New Jersey's Commerce Bancorp Inc CBH.N. That transaction valued the latter at 2.9 times book value, according to Lehman Brothers Inc. analysts.

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Three years ago, Western European banks eyed Eastern Europe, "where they viewed the real growth," for acquisitions, Duffy said.

"Banks in places like Romania were sold at five-plus times book value," he said. "People started to say, 'Is Romania the bargain, or is United States the bargain where you can buy something at 2.5 times book value?' The point is made stronger with the dollar having depreciated."

Septuagenarian James Cayne's Bear Stearns Cos BSC.N is considered a takeover target following the collapse of two hedge funds it ran that invested heavily in subprime mortgages. Bear Stearns may have bought time after last month striking an investment pact with China's CITIC Securities Co.

"Is there some foreign buyer for a Bear Stearns or some other actor in the brokerage industry? Possibly," Duffy said. "The market caps are pretty big, but it's getting cheaper by the day because prices are going down and the dollar is going down. At some point, Bear, if they wanted to find a buyer for the entire company, there might be a buyer offshore."

For commercial banks, the wait might be long.

"Banking may in fact be one of the more active sectors because a lot of deals tend to be stock-for-stock, so they're not as dependent on outside financing," he said. "You'll see some bank activity relative to the rest of the industry, but over the next six months at least it's going to be at a much slower pace than we would have said earlier this year."

(For summit blog: summitnotebook.reuters.com/)