Which Large Bank Is a Target?

Barclays Bank (NYSE: BCS), the U.K.'s second-largest bank, is on the prowl for a U.S. retail bank. The record of European banks acquiring U.S. lenders isn't good -- recall HSBC's (NYSE: HBC) disastrous purchase of subprime lender Household International. Does a deal make sense?

Barclays has emerged as one of the "winners" of the financial crisis, with M&A playing a major role. Its acquisition of Lehman Brothers' North American assets out of bankruptcy was a fantastic coup: In 2009, Barclays recorded a $4.2 billion net gain on the $1.75 billion transaction.

The target list
Although no deal is imminent, analysts and bankers refer to the following institutions as likely targets for Barclays:

Source: Capital IQ, a division of Standard & Poor's.

Buying cheap funds ...
Purchasing a U.S. retail bank would raise Barclays' deposit base -- a low-cost source of funds (that will become even lower cost relative to other, riskier types of bank funding if the government ultimately decides to tax the latter). However, at a time when the prevailing political winds are blowing in the direction of a separation of investment and commercial banking activities, it is by no means assured that regulators would look favorably on such an acquisition.

... with cheap shares?
Furthermore, Barclays would likely need to issue shares to complete the acquisition; with the U.K. bank's shares trading at a significant discount to those of three of the four banks in the above table (SunTrust is the exception), it had better make an ironclad case to its own investors.