Big Banks

In the Spotlight: NationsBank Corp.

NationsBank <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NB)") else Response.Write("(NYSE: NB)") end if %> caught some flack last week when it announced an agreement to acquire Barnett Banks of Florida, mainly because of what was perceived to be a high price/book ratio on the deal. Should the deal go through, NationsBank will become the third-largest bank in the country and will add the 12th largest consumer lending institution in the country to its well-balanced business mix. In fact, Barnett looks more like a specialty finance company in its ROA above 1.5 and ROE of 25%+.

Looking at combined pro-forma numbers (assuming an integration of financials), NationsBank with Barnett included is trading at 16 times earnings and 15 times amortization-adjusted net income, giving NationsBank the lowest amortization-adjusted P/E in the group outside of Chase. Following the company's guidance that it can cut overhead at Barnett by 50% and assuming that net interest income will decline by 10% in the short run due to selling assets because of anti-trust concerns, pro-forma net income for the combined company would jump from $3.32 billion to $3.8 billion, giving it a pro-forma P/E of 14.5 and a pro-forma amortization-adjusted P/E of 13.5.

NationsBank will take control of 30% of Florida's deposits, a great place to own as much of one market as one bank can. Because of the demographic makeup of the state, more trust business should be coming NationsBank's way, as well as giving the company an excellent addition to its outlets for cross-selling of insurance products and retail distribution of securities and other financial services.

With the recent acquisition of Montgomery Securities, NationsBank takes another step toward transcending the worn "regional bank" distinction and becoming a world-class financial institution. At a pro-forma amortization-adjusted P/E of 15 and with an acquisition that should immediately add to earnings, NationsBank poses a most interesting proposition to investors who believe that Hugh McCall and NationsBank can pull off another flawless acquisition and garner a higher valuation on higher earnings.

The Financials

Through six months, NationsBank posted the largest revenue increase, at 16%, of any of the traditional banks in the focus group. At the same time, total interest expense rose just 8.4%. "Other expenses" rose by over a quarter of a billion dollars, putting a lid on EPS growth of 3%. Through six months of 1997, net loans grew 22.7% and revenues jumped 26%, but EPS growth muted at 7.7% because of unspecified expenses.

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