Look behind you, Chase and Citicorp: NationsBank is coming on strong in its quest to be number one

Kiplinger's Personal Finance Magazine, Jan, 1998 by Ken Sheets

Nationsbank is aptly named because that's exactly what chairman and chief executive officer Hugh McColl wants it to be -- the nation's banker. During the past decade, the 62-year-old ex-Marine transformed what was once North Carolina National Bank into the nation's third-largest bank in terms of assets, behind Chase Manhattan and Citicorp, and the second-largest in stock-market capitalization, behind Citicorp. And he's not finished. Declares McColl: "Our goal is to build the number-one consumer, small-business and commercial banking franchise in the U.S."

Based in Charlotte, NationsBank hit the big time in 1989 when it bought First Republicbank, Texas's largest bank, for $1.3 billion. The Houston bank was on the block after being shut down by the Federal Deposit Insurance Corp. in the wake of the collapse of the Texas real estate market. That enabled Nationsbank, then known as NCNB, to nearly double its assets and gain entry into one of the fastest-growing regions of the U.S.

Recently, Nationsbank added to its strength in the South by putting the finishing touches on the buy that will catapult it to near the top of the U.S. banking industr. Its $15.5-billion purchase of Florida's Barnett Banks was the most expensive bank sale ever until the November purchase of CoreStates Financial by First Union. In the fall, NationsBank also acquired Montgomery Securities, the San Francisco investment bank, for $1.2 billion, and renamed it Nationsbanc Montgomery Securities.

THE CASE FOR INVESTING

Although a number of analysts argue that NationsBank paid too much for Barnett, McColl is confident that he can make it pay. He expects to recover $915 million over the next two years, or 55% of the sale price, through cost-cutting, sale of assets and consolidation of operations. "NationsBank has a great track record for making acquisitions work," notes John Mason, an analyst at the Charlotte brokerage of Interstate/Johnson Lane.

The acquisition of Barnett gives NationsBank one-third of all bank deposits in Florida and the number-one position in nearly all the cities in that state. Wheat First Butcher Singer analyst Edward Najarian, one of those who believes that NationsBank overpaid for Barnett, concedes that the Florida market is one of the most attractive in the nation.

Analysts believe McColl will use Montgomery, with its West Coast roots and extensive contacts, as its battering ram to enter the banking business in California. In a recent speech, president Kenneth Lewis said that NationsBank will expand beyond its current 16-state region through acquisitions. "California," he noted, "has an economy that would place it among the five or six largest countries in the world."

So far, NationsBank's strategy of growth through acquisitions has served investors well. The stock's total return over the past five years to November 7 was an annualized 24.5%, versus 20% for Standard & Poor's 500-stock index. The consensus of analysts surveyed by Zacks Investment Research is that earnings will grow at an annualized rate of 12% for the next five years. At its recent price of $59, NationsBank traded for 14 times its 1997 earnings estimate of $4.27 per share and 12 times its 1998 estimate of $4.94 per share. The stock recently paid a 2.5% dividend.

RISKS TO CONSIDER

Value Line Investment Survey analyst Theresa Brophy says it best: NationsBank "has its plate full." She says it will take a while for the company to absorb Barnett and Montgomery. Wheat First's Najarian says that because of the high price paid for Barnett, NationsBank's earnings growth will be slowed for the next year or so. Moreover, Najarian is skeptical that NationsBank can achieve the huge savings it envisions without any significant revenue loss. Adds Brophy: "Investors may want to wait until both Montgomery and Barnett are on board for a quarter or two before making new commitments."

Diebold comes in where bank tellers leave off

IN AN EFFORT to reduce costs and increase convenience, NationsBank is closing many "brick and mortar" branch banks and replacing them with ATMs at grocery stores, shopping malls, airports, hotel lobbies and just about every other available space. So is every other bank in the country. That's good news, indeed, for Diebold (symbol DBD, NYSE, recent price $46), the nation's largest manufacturer of the ubiquitous ATMs.

Something of a rarity just 20 years ago, ATMs now number 160,000 in the U.S., and their ranks are growing by about 20% per year Diebold, headquartered in Canton, Ohio, has a 55% share of the U.S. market and is the world's second-largest provider of ATMs.

But Diebold considers the U.S., Europe and Japan mature markets and is looking elsewhere for future growth, particularly in Latin America, where ATMs are just catching on. The company earns 22% of its revenues from foreign sales, but expects that to become 35% in the next three to five years.

At home, Diebold's ATMs are becoming ever more versatile. Its new Interactive Marketing Terminal, for example, provides bank customers with 24-hour access to statements, interest-rate quotes, loan applications and investment services (not to mention cash). Another new product, the MicroBranch, allows banks to install highly automated branches in grocery stores and shopping malls at one-tenth the cost of a regular branch.