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'Retail' Strength Aids Cross-Sales

Retail banking skills will increasingly determine the success of regional banks in the years ahead, according to analysts at Merrill Lynch.

Retail banking will be key to spread-based revenue growth, cross-sales and fee-revenue growth, analyst Edward Najarian said in a recent report from the investment banking firm.

"Banks that successfully combine strong service quality with a wide product array and an expansive distribution network should demonstrate better customer retention and cross-sale statistics. However, only a few banks will effectively pull this off, given the difficulty in executing a cross-sale strategy," the report said.

And banks that gain market share and cross-sell products and services should generate better fee revenue in addition to countering a flatter yield curve, according to Merrill Lynch.

Not surprisingly, some of the stocks that top Merrill Lynch's list of recommended companies have a strong presence in retail mortgage banking and mortgage servicing. Wachovia, Bank of America and Wells Fargo are "in the best position to expand" their price-to-earnings ratios via retail execution, according to the report. All have shown strong deposit market share growth in recent years.

Two of the three all have price-to-earnings ratios that trail the industry average, according to Merrill Lynch. Wachovia has the "most 12-month upside" among the three because of its presence in growth markets and its cross-sales improvement in recent years, according to Merrill Lynch. Bank of America has the largest distribution network and has improved its

service quality in recent years.

While Wells Fargo, the nation's second-largest mortgage lender, does not typically trade below the average price-to-earnings ratio for its group, Merrill Lynch describes the company as "a safe choice."

"Among big banks, WFC has historically been the leader in retail banking and cross-sales," the report said.

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