Competitors seek profit from Wachovia's woes

Wachovia's well-known financial woes and its pending acquisition by Wells Fargo are providing an opportunity for competitors to try their hardest to capture some of the Charlotte bank's customers.

“You have one of the best franchises in the Carolinas being acquired by a West Coast bank,” said investment banker Bill Wagner of Howe Barnes Hoefer & Arnett in Raleigh. “It's an opportunity for all banks.”

In an earnings conference call Thursday, BB&T Chief Executive John Allison said his bank will benefit from the sale of Wachovia, its biggest competitor. BB&T attracted $1.2billion in deposits from Wachovia, he said.

“Wachovia has violated a trust with its shareholders and clients that will be hard to repair,” said Allison, who is retiring in December after 19 years leading Winston-Salem-based BB&T.

“We were clearly seeing a flight to quality at the end of the quarter,” which has continued into October, he said.

“We always have a target on our back,” said Jack Clayton, Wachovia's regional president in Raleigh. Clayton contends deposit data doesn't give the complete picture because it doesn't include money that customers invest through Wachovia.

Wachovia is a giant in North Carolina deposits, according to federal data as of June 30. Throughout the state, it holds 44 percent of all deposits – far ahead of No. 2 BB&T and No. 3 Bank of America, which have about 12 percent each.

In the Charlotte area, Wachovia's lead is even more pronounced: It holds 69 percent of all deposits here, while No. 2 Bank of America has 19 percent.

Smaller banks say they're seeing an upside to Wachovia's situation.

“You hate to think you are profiting when someone else is down, but yes, it will benefit us,” said Gregg Strickland, CEO of Patriot State Bank south of Raleigh.

Industry analysts say it's unlikely competitors will try to lure Wachovia customers by substantially raising interest rates on deposits or lowering fees. Nor are they likely to resort to gimmicks.

“What they are selling is security and strength,” said Buddy Howard of Equity Research Services, a Raleigh firm that tracks the banking industry. “They are not going to get a customer to deposit a bunch of money with you for a free toaster, if (the customer) doesn't think their money is safe.”

Current ad campaigns by several Raleigh-area banks pointedly focus on financial strength, safety and stability. The ads don't mention Wachovia but the underlying message is that “these are things that do not apply to … the Wachovia of 2008,” Howard said.

A SunTrust ad that appeared in The (Raleigh) News & Observer and elsewhere even goes so far as to say, “When you're ready to switch accounts, we're here to help.”

John Stallings, who heads SunTrust's Central Carolinas region, said the campaign isn't aimed solely at Wachovia customers. Rather, he said, the volatility in the banking industry is putting a lot of customers in “shopping mode.”

Stallings said that beginning last year, SunTrust also stepped up its efforts to call on wealthy individuals and businesses who aren't clients in hopes of converting them.

“The way we win business is where we're in front of clients and they have a chance to hear our story, our capabilities, our expertise, etc.,” Stallings said.

Certainly some Wachovia customers have sought an alternative. On Sept. 26, as rumors swirled about Wachovia's future, the bank lost $5 billion in deposits in a “silent run,” or about 1 percent of the bank's $448 billion in deposits nationwide, according to court filings.

“A lot of the uninsured money was leaving Wachovia a month ago,” said Tony Plath, a finance professor at UNC Charlotte, referring to deposits exceeding the amount insured by the FDIC. That outflow, he added, has benefited competitors of all sizes.

But Wachovia's Clayton said that, in the Triangle, most of the deposits the bank lost – the bank isn't disclosing how much – didn't migrate to the competition. Instead, he said, a majority went to Evergreen Investments, an investment management company that is owned by Wachovia Corp. but isn't part of the bank. Wachovia advised its customers their money was safe at Evergreen regardless of the bank's fate.

The federal government recently took steps to make deposits safer at all institutions, and Wachovia's future seems assured because of the Wells Fargo deal. But competitors will get another opportunity to lure away customers when Wachovia signs are replaced with the Wells Fargo logo. When that occurs, the volume of lost deposits will be determined by how well – or how poorly – the two banks merge operations.

“If Wells is as good as people say they are, they should be able to keep runoff under 5 percent,” Plath said. But a poorly managed merger could cost the bank 10 percent or more of its deposits.

Clayton said he's confident the merger will go smoothly because the combination of First Union and Wachovia in 2001, widely viewed as a success, was modeled after the 1998 merger between Wells Fargo and Norwest. Fewer customers than expected departed when First Union and Wachovia merged to form what is now Wachovia, said Plath, because the process was managed well.

The combined Wells Fargo and Wachovia will have 6,675 branches, more than any other bank. “We will be better off,” said Clayton. “It's just the route that got us here that was painful.”

Grant Yarber, CEO of Raleigh's Capital Bank, agrees the big tug-of-war for Wachovia's customers is yet to come.

Bloomberg News and Observer reporter Christina Rexrode contributed.