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By Joseph A. Giannone and Paritosh Bansal
NEW YORK, Oct 24 (Reuters) - On fickle Wall Street, bank
deposits are "in" and capital markets are "out."
After more than a decade of seeking riches in capital
markets and investment banking, U.S. commercial banks are
rushing back to the traditional business of gathering deposits,
lending it out and keeping the difference.
The latest blow to the fee-based strategy came Friday, as
PNC Financial Services Group Inc (PNC.N) agreed to acquire
National City Corp NCC.N for a deeply discounted $5.6
billion, aided by $7.7 billion raised from the U.S. Treasury.
PNC said the deal was attractive because it will double
PNC's deposit base to $180 billion, making it fifth-largest
U.S. bank and creates the No. 4 branch network.
"At a time when core funding is key, we see our deposit
strength as an important success factor," PNC Chief Executive
James Rohr said.
For years bankers expanded into Wall Street businesses,
touting their ability to generate fees, despite the ups and
downs of interest rates. But the financial market meltdown of
the past year has reversed that trend.
"If you look at the business over decades and decades, the
banking industry has been able to go through many, many cycles
and many, many mistakes quite frankly because of that core
deposit franchise," Rohr told analysts Friday.
That view is increasingly shared by others, as the largest
banks turn their attention to expanding branch networks and
amassing pools of deposits. Even securities giants Goldman
Sachs group Inc (GS.N) and Morgan Stanley (MS.N) have become
banks and joined the hunt for deposits.
"There is a general view that spread lending businesses are
becoming more attractive. Risk is being priced into deals,
which means you can get paid for taking credit risk and we
expect to see spreads widening here," one investment banker
source said. "Having core deposits is more attractive."
NEW STRATEGY
Banking on deposits marks a shift in strategy for the
Pittsburgh-based PNC, which for years touted its so-called fee
businesses such as money manager BlackRock Inc (BLK.N), in
which it owns a minority stake, capital markets unit and PFPC
Worldwide, an investment services company.
Yet analysts said market businesses have been more of a
liability during the past year.
"PNC has been highly dependent on capital markets, but that
segment of the revenue model is gone," said Stifel Nicolaus
bank analyst Collyn Bement Gilbert. "If I were a bank, I'd be
adding to the spread side of the business. That is where the
opportunity will be in the next decade to maximize revenue."
This strategy has already been put into play by JPMorgan
Chase & Co, which snapped up troubled thrift Washington Mutual
Inc from the FDIC for $1.9 billion, and by Wells Fargo & Co
(WFC.N), which trumped a low-ball Citigroup Inc (C.N) bid to
take over East Coast banking giant Wachovia Corp WB.N.
More commercial and investment banks, which have seen how
unreliable capital markets can be when times are tough, are
expected to also bulk up on low-cost retail deposits.
"When you think about what is the ideal company of the
future, it should be able to fund a hundred percent of any
loans it has with deposits," a second banker said.
This trend is also getting a nudge from Uncle Sam, which
wants strong banks to buy up the weaker banks and reduce the
burden of the credit crunch on federal deposit insurance.
Analysts said possible acquirers include Buffalo, New
York-based M&T Bank Corp (MTB.N) and BB&T Corp (BBT.N) of
Winston Salem, North Carolina.
Meanwhile regional bank US Bancorp (USB.N) and Canada's
Bank of Nova Scotia (BNS.TO) had placed bids on National City,
sources told Reuters.
"We've been through a credit crisis and then a liquidity
crisis. The third leg will be managing credit through a
recession," Stifel's Gilbert said. "That goes back to banks
with solid business models and a core conservative approach."
(Additional reporting by Dan Wilchins; Editing by Andre
Grenon)
