In a potential blow to Charlotte's status as a major banking power, Wachovia is in preliminary merger talks with multiple suitors, according to reports Friday. It's the latest unsettling moment for the Charlotte bank, which is wrestling with bad mortgage loans and a depressed stock price.
Wachovia is in early discussions with Citigroup of New York, Wells Fargo of San Francisco and Banco Santander of Spain, according to The Wall Street Journal and The New York Times, which cited people familiar with the situation. Executives are exploring options, but aren't in a rush to do a deal, the Journal said.
The outcome holds major import for Charlotte, where the bank is one of the city's biggest employers and civic players, along with rival Bank of America. A merger could steal the city's claim as Wachovia's headquarters and pose possible layoffs among its 20,000 employees here.
Citigroup, Wells Fargo and Santander are larger in market value than Wachovia and would likely play the dominant role in a deal. That would contrast with the typical course of Charlotte's big banks, which have expanded nationwide by gobbling up other cities' institutions. Bank of America, in fact, has capitalized on the industry's turmoil by forging a deal this month to buy brokerage Merrill Lynch.
Word of the talks emerged as Wachovia, the nation's No. 6 bank by assets, rushed to assure investors and clients that it was a stable financial institution in the wake of the failure and sale of Seattle-based Washington Mutual, the nation's biggest savings and loan. Wachovia's shares fell 27 percent Friday, or $3.70, to $10, in a plunge aided by uncertainty over financial industry bailout talks in Washington.
Wachovia has a “strong and stable deposit base” and has added 745,000 checking accounts since June, spokeswoman Christy Phillips-Brown said. The bank had about $448 billion in total deposits as of June 30, but she didn't provide an updated figure. The bank was considered “well-capitalized” by regulatory standards, according to its last quarterly report.
In contrast, WaMu had faced a rapidly deteriorating financial condition. Since Sept. 15, it had shed about $17 billion in deposits, according to regulators, who facilitated a sale to JPMorgan Chase on Thursday.
Wachovia's talks are the latest twist in a month that has seen the financial world reshaped by a flurry of deals driven by the ongoing fallout from the nation's mortgage meltdown. The discussions mean another weekend or longer of uncertainty for employees, shareholders and policymakers. Earlier this week, a possible Wachovia merger with Morgan Stanley apparently fizzled after the New York investment bank converted to a bank holding company and extracted an investment from a Japanese bank.
Wachovia on Friday said it doesn't comment on merger speculation, and representatives of Citi and Wells Fargo said the same. Santander could not be reached.
Saddled with mortgage losses from its 2006 Golden West Financial acquisition, Wachovia has been perceived as one of the nation's more troubled major financial institutions. But in recent months, Wachovia chief executive Bob Steel, a former Treasury Department official, has been taking steps to cut costs, shed troubled loans and preserve capital.
“We have a great future as an independent company, but we're a public company, so we're going to do what's right for shareholders,” the Durham native said on CNBC earlier this month.
Investors may be sending Wachovia's shares downward because they're worried that the government's $700 billion bailout will be tabled. If that's the case, Wachovia will seem “a lot more vulnerable,” said James Early, an analyst at The Motley Fool. The Journal suggested any Wachovia deal could be dependent on talks in Washington.
“A lot of it depends on political moves, and that's a very hard thing – to figure out what the government is going to do,” Early said.
WaMu was a major player in the nation's mortgage mess, making subprime loans and exotic adjustable rate mortgages. Wachovia was an even bigger purveyor of adjustable-rate Pick-A-Payment mortgages, but it has stopped making the loans and is now working to refinance customers into more traditional products.
Gary Townsend, a former analyst who has launched a Maryland-based investment firm, says Wachovia is a stronger company than Washington Mutual. Commercial banks like Wachovia generally have a stronger deposit base than thrifts like Washington Mutual, which rely heavily on federal home loans. Wachovia is also more diversified in the services it offers, with a large money-management team and a strong investment-banking unit, which makes it better able to weather the mortgage meltdown.
As his bank's shares fell earlier in the day, Wachovia's Steel posted a message on the bank's Web site that said management “is watching these events carefully and must plan and remain flexible,” adding “we are strategically protecting and managing liquidity and capital in this challenging environment.”
Steel, as he has done since taking the job in July, also highlighted the company's strong customer service, retail banking franchise, large brokerage operation in affluent markets and corporate banking expertise. “Our core franchises are extremely valuable and continue to operate well relative to our competition,” Steel said. He also said Wachovia remains optimistic that leaders in Washington “will provide comfort to the markets with a plan to stabilize the housing and short-term funding markets.”
Merger talks with multiple players mean a variety of scenarios for Wachovia, including the possibility it survives on its own. The three banks reportedly eyeing Wachovia all examined WaMu's books before taking a pass. Steel has raised the possibility of sealing off Wachovia's distressed assets in a “bad bank” structure in a way to protect the surviving “good bank.”
A deal with Citigroup, which has its own mortgage-related problems, would combine Wachovia's respected retail bank with a much bigger player on Wall Street and overseas. A pairing with Wells Fargo has long been contemplated because it would meld Wachovia's dominant East Coast franchise with Wells Fargo's huge West Coast presence. Wells has fared better than many banks in the industry downturn, buoyed by more cautious lending standards.
A deal with a foreign bank such as Santander could be the best result for Wachovia. That's because a foreign bank could keep Charlotte as the U.S. headquarters, potentially preserving jobs and office space around the city.
Wachovia is in the middle of building a new headquarters tower amid an expansive arts complex on South Tryon Street.
Other struggling banks also saw their shares fall Friday, including Cleveland-based National City. Its stock dived 25 percent. But not all bank stocks suffered. Bank of America closed at $36.70, up 7 percent. Wells Fargo gained 9 percent, and Citigroup 4 percent. JPMorgan Chase gained 11 percent.