Banking's Compass Points to Spain

Spanish cuisine is often represented by tapas -- those little plates of assorted appetizers. But Spanish banking giant Banco Bilbao Vizcaya Argentaria (NYSE: BBV  ) seemed to have an appetite for something more substantial when it agreed to buy Alabama-based Compass Bancshares (Nasdaq: CBSS  ) . The Compass acquisition, which was announced on Friday and is valued at $9.6 billion, is a meal of American-sized proportions that would make BBVA one of the top 20 banks in the United States. BBVA's American unit would have nearly $47 billion in assets and a network of 622 branches across seven states.

Compass operates 417 branches in six states across the Sun Belt, with nearly half of the branches located in the high-growth Texas market. The bank's regional franchise is well-regarded for its efficient operations and high credit quality. In 2006, Compass achieved record earnings of $460.4 million or $3.53 per share and boasted a non-performing loan ratio of just 0.23% on a loan portfolio of $24.3 billion. The company's $34 billion in assets ranks it as the 39th largest U.S. bank.

The acquisition of Compass would fit with BBVA's global competitive strategy, but it also suggests a willingness to take a more aggressive approach to the U.S. market. The bank has a long record of pursuing growth opportunities outside its home market, with special attention to Latin American markets. Its strong presence throughout Latin America includes the Bancomer subsidiary, Mexico's largest bank. BBVA's small U.S. footprint, however, seemed to reflect the limited ambition of complementing that Latin American franchise by providing a channel for Mexicans working in the United States to send their earnings home. Tapping into the market for retail money transfers has been an important business objective for financial services companies as diverse as Western Union (NYSE: WU  ) and Citigroup (NYSE: C  ) , which has its own Mexican banking subsidiary, Banamex.

This latest deal shows that BBVA's U.S. ambitions are actually quite expansive. Compass is among the largest banks in Texas, and its full-service banking platform puts it in direct competition with national banks like JPMorgan Chase (NYSE: JPM  ) and Bank of America (NYSE: BAC  ) that have leading positions in the Texas market. Despite the prospect of facing such fearsome competitors, BBVA has reason to consider the U.S. market an attractive opportunity. The U.S. banking industry remains largely fragmented, with further consolidation of smaller banks likely to occur, and BBVA, one of the world's largest banks, has shown it has the experience and resources to succeed in dynamic markets. Indeed, the bank's sophisticated marketing tactics and efficient operations have allowed it to generate returns on equity that are often superior to many of the larger U.S. banks' returns.

It remains unclear whether this transaction will trigger other acquisitions and accelerate the pace of industry consolidation. Compass' takeover price of $71.82 per share is equivalent to 4.6 times tangible book value and represents a premium of 16% over the stock's recent trading range. Recent bank acquisitions commanded more modest multiples of book value, and many analysts had already considered the regional banking group overpriced. With bank profit growth expected to slow this year as a result of deteriorating credit quality and pressure from an inverted yield curve, there is certainly a sound basis for other potential acquirers to proceed cautiously.

Nevertheless, each new acquisition heightens the musical-chairs quality of the consolidating bank industry. In an environment where large-cap banks with growth ambitions may fear losing an important takeover opportunity to a quicker rival, certain regional banks present themselves as appealing candidates for strategic acquisitions. In particular, banks such as Regions Financial (NYSE: RF  ) , Cullen/Frost Bankers (NYSE: CFR  ) , and Colonial BancGroup (NYSE: CNB  ) , which are located in high-growth southern states, may soon tempt BBVA's American rivals to step up to the table.

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Fool contributor Michael Leibert welcomes your feedback. He does not have a position in the shares of any of the companies mentioned above. The Fool has a disclosure policy.


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