Struggling Regional Banks Looking More Like Merger Bait

Big regional banks, hit with big third quarter losses, are quickly becoming merger bait.

National City, Fifth Third Bancorp, and Keycorp have all have seen significant losses in the past quarter although none has been as staggering as the $23.7 billion quarterly loss racked up by soon-to-be-acquired Wachovia.

The regionals’ weak performance and, in some cases low stock prices, make them seem likely candidates for mergers. Indeed, Treasury Secretary Henry Paulson has said that’s precisely what he wants some of the big regionals to do and that the $700 billion federal bailout should make such linkups easier.

Leading the prospects is Cleveland-based National City which lost $729 million in the third quarter and has announced 4,000 layoffs. The bank’s stock price has dipped from about $15/share earlier this year to $2.99/share yesterday making it a relatively cheap buy.

Keycorp, likewise based in Cleveland, lost $36 million and has the second weakest stock price on the list, trading yesterday at $9.74/share.

Fifth Third, based in Cincinnati, lost more money with a $56 million decline in the third quarter, but it would be a more expensive merger prospect with stock trading at $29.72/share.

Although not reporting  a loss, Minneapolis-based US Bancorp likewise registered net income in the third quarter of $576 million compared with more than $1 billion for the quarter a year ago. Its stock was relatively strong at $29.72/share.

Although any combination is possible, either Fifth Third or USBancorp would be in a stronger position to acquire either Keycorp or Nation City. There may be significant overlap since all four banks are heavily Midwest-oriented, but Paulson is betting that it is better to merge than to fail.