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Tickers in this Article: USB, WM, MTU, FITB, KBE, FITB, ZION, C, WB, WFC
These haven't exactly been heady days for bank stocks. Even with a 30% bounce off the lows for the KBW Bank ETF (NYSE:KBE), investors holding bank stocks may feel like they've been getting smacked in the head over the past year. The question now is whether the declines are overdone, and whether the cavalry may be riding to the rescue of bank investors in the form of mergers and takeovers.

From the looks of it, investors hoping to be made whole on unsuccessful bank investments may be in for a long and ultimately disappointing wait.

Banking Bargains?
It's not as though this drop in the sector is without merit or explanation, home prices are falling, defaults are rising, capital is expensive, and liquidity is now at a premium. All in all, it's not a great time to be in a hugely leveraged industry that is dependent upon access to cheap capital. Nevertheless, when sectors sell off en masse, you often see the slightly scratched and dented merchandise get slashed right alongside the badly broken specimens.

In the case of banks, there's a huge difference between banks with questionable balance sheets and small business footprints and banks with stressed balance sheets but sizable retail businesses. After all, while there are some folks who will change banks for an extra tenth of a percentage point on a CD, most people would just as soon avoid the disruptions that go with changing your primary bank.

That could well prove to be the case with large franchises like Washington Mutual (NYSE:WM), Fifth Third (Nasdaq:FITB) and Zions Bancorp (Nasdaq:ZION). All of these banks are experiencing real stress now (for somewhat different reasons), but all have real multi-state businesses that could be leveraged by a stronger and healthier competitor. (To learn to think like a predator, read How The Big Boys Buy.)

M&A Activity On Hold, For Now
The fundamental problem, however, is that mergers and acquisitions require two willing parties and, for now, the stronger American banks seem content (or in some cases, compelled) to wait. Citigroup (NYSE:C) and Wachovia (NYSE:WB) are trying to keep the wolves at bay themselves, while Wells Fargo (NYSE:WFC) is navigating the troubles in California, and U.S Bancorp (NYSE:USB) seems content to keep quietly building its substantial non-depository businesses.

Certainly their level of caution is understandable. After all, the banks that are in relatively good shape today are those that didn't take outsized risks as the housing bubble inflated. What's more, when you consider the turbulence in housing and lending, and the sometimes-murky nature of bank balance sheets, you can build a good case that buying another bank today is an invitation to large downside and limited upside. (To learn more, check out Analyzing A Bank's Financial Statements.)

Foreign Buyers to the Rescue?
That's not to say that the cavalry won't come - they may just be wearing a different uniform. Mitsubishi UFJ's (NYSE:MTU) buyout of UnionBanCal (NYSE:UB) may be just the beginning of an influx of foreign buyers. After all, global diversification of risk has its perks, and institutions like Banco Santander (NYSE:STD) or Italy's Unicredito may find that the next 12 months present an opportunity to begin building an American banking platform.

The problems for investors, however, are timing and price. UnionBanCal investors got a good price, but they were dealing with a buyer that already owned a healthy slug of stock and also happens to be facing a home market (Japan) that is stagnant and seemingly devoid of major organic growth opportunities. Investors in other banks may find themselves in a tougher predicament; potential buyers can afford to wait and pick off franchises when they're desperate for capital and in no position to drive a hard bargain.

Bottom Line
For patient investors in the financial services industry, this very well could be a point in history that is remembered fondly as an opportunity to build positions in durable, high-quality franchises whose value has been undermined by a really ugly environment. But investors expecting to make a quick profit trading on the idea of the imminent rescue of troubled banks may find that the would-be cavalry has more patience than they do.

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