Wachovia Is One Big Deal

Banking giant Wachovia (NYSE: WB  ) has a reputation for actively acquiring rivals, which is the primary reason it has grown into the fifth largest bank in the land. Its second quarter was no exception, and there is another big deal in the works. But will buying market share work forever?

Maybe it will, because Wachovia was able to report another strong quarter because of the recent purchase of California-based Golden West Financial. Results including the acquisition led to double-digit earnings growth and a strong top-line boost as Wachovia now gets to count the purchased interest and non-interest income as its own. These two key banking metrics grew close to 20% compared with last year's second quarter.

Better yet, giant deals lead to even larger cost-cutting activities, which allow Wachovia to leverage slower sales growth into higher profitability. It looks like the promised merger synergies have yet to offset the challenges of operating under a flat to inverted yield curve as net interest margin and return on equity fell for another quarter, but investment banking and other fee-related trends continue to come in strong as well.

Get ready for more M&A as Wachovia agreed to acquire St. Louis-based regional broker A.G. Edwards (NYSE: AGE  ) at the end of May. The purchase should allow Wachovia to further beef up its investment banking, asset management, and investment brokerage business. And don't forget about those cost-cutting efficiencies -- if things turn out similar to Bank of America's (NYSE: BAC  ) acquisition of hometown hero Boatman's Bank a number of years ago, expect most of the research staff to be sent packing or further out East if they want to stay employed.

With close to a $100 billion market capitalization, one would think Wachovia has become too big to keep doing deals. However, considering that JPMorgan Chase (NYSE: JPM  ) is 60% larger and archrivals B of A and Citigroup (NYSE: C  ) have grown twice as big by pursuing similar avenues to growth, it's easy to see that Wachovia has plenty of room to expand.

I recently anted up for Wells Fargo (NYSE: WFC  ) , as I am impressed by its organic growth track record, and have yet to do further research on Commerce Bancorp (NYSE: CBH  ) , which also grows briskly without relying on acquisitions. Both avenues to growth have worked out well for shareholders, but I see big buyouts as the riskier way to go and can't believe that they will go on indefinitely.        

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Fool contributor Ryan Fuhrmann is long shares of Wells Fargo but has no financial interest in any other company mentioned. Feel free to email him with feedback or to discuss any companies mentioned further. The Fool has an ironclad disclosure policy.


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