Magazine article American Banker

If Schwab Buys for Bank, Pitfalls Seen by Analysts

Magazine article American Banker

If Schwab Buys for Bank, Pitfalls Seen by Analysts

Article excerpt

Analysts appear divided on whether acquisitions make sense for Charles Schwab Corp.'s retail banking unit.

This week the San Francisco brokerage company said it could pursue acquisitions for its three-year-old Reno bank, which in November hired a president and chief executive officer, Noor Menai. Mr. Menai, 41, joined the $10 billion-asset bank from Citigroup Inc., where he was a managing director in the corporate and investment bank.

During an investor presentation in San Francisco Monday, Charles R. Schwab, Schwab's chairman and chief executive, said one of Mr. Menai's immediate tasks is to decide what elements of the largely outsourced banking business might be brought in-house. "We may think about in-sourcing a few things [at the bank], and that might include an acquisition," Mr. Schwab said. The company said Mr. Menai was unavailable for an interview Tuesday.

Analyst Brad Hintz of Alliance Bernstein LP's Sanford C. Bernstein LLC said Schwab would be hard-pressed to find a deal in the banking realm that adds value to the entire company.

"I can't think of any bank acquisitions that increase the valuation of a high price-to-earnings brokerage firm," he said. "If I bring in mortgage origination, I've increased my fixed costs, I've increased my plant and equipment," and the return on that investment will be lower than the return from alternative uses of the capital, such as share buybacks, Mr. Hintz said in an interview Tuesday.

However, Lauren Bender, the manager of the wealth management group at the Boston research firm Celent LLC, said Schwab is shrewd enough to pick the right kind of deals and leave alone the operations that it makes sense to outsource.

Above all, the company needs to keep up with competitors that are integrating banking and brokerage services in ways that Schwab cannot with its current outsourcing model, she said. …

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