Mass. banks stand to make gains

Competition may benefit consumers

The shape of the Massachusetts banking industry, dominated by four out-of-state giants and dozens of community banks, isn't likely to change as the big national banks consolidate, analysts said.

But the ferment might work to the advantage of consumers as banks jockey to shore up their deposits and attract new customers by boosting interest rates on certificates of deposits and other products. Those efforts could be aided by the bailout bill passed in the US House of Representatives yesterday, which temporarily raised the federal insurance cap on bank accounts from $100,000 to $250,000.

Massachusetts banks, which were blindsided by the commercial real estate slump of the early 1990s, have been less affected by the current housing bust. Unlike their counterparts in Florida and California, analysts said, banks here sold fewer risky subprime mortgages and carry fewer nonperforming loans.

Heavy exposure to subprime loans weakened national banks like Wachovia Corp. of Charlotte, N.C., which yesterday agreed to be acquired by Wells Fargo & Co. of San Francisco for $15.1 billion. Last week, federal officials seized similarly exposed Washington Mutual Inc. of Seattle and sold it to JPMorgan Chase & Co. of New York.

While some Massachusetts banks may have to take third-quarter charges to write off preferred stock they hold in failed mortgage lenders Fannie Mae and Freddie Mac, as Sovereign Bancorp Inc. already has said it will do, analysts said that exposure is limited and most regional banks should emerge from the financial crisis healthy enough to vie for more commercial and consumer customers.

"We could see some benefit to the commercial banks," said Gerard Cassidy, managing director of equity research at RBC Capital Markets in Portland, Maine. "The capital markets stole a lot of business from banks over the past 50 years. Over the next 10 years, we envision more business coming back to the commercial banks because what's happening on Wall Street will have a lasting effect."

That means companies could step up borrowing from banks rather than floating commercial paper on Wall Street, he said, while consumers might shift money into federally insured bank savings accounts or certificates of deposit from riskier money market mutual funds. Mutual fund companies had to inject millions of dollars to shore up their money market funds last month after several lost money.

Four out-of-state banks - Bank of America Corp., Royal Bank of Scotland Group, Sovereign, and TD Bank - together hold more than half of all deposits in Massachusetts banks. While the four appear secure, analysts said, community banks stand to gain if the giants are distracted by problems at their branches in other states.

"A lot of the community banks have been more conservative," said Damon DelMonte, vice president and regional analyst in the Hartford office of investment bank Keefe, Bruyette & Woods Inc. "They haven't seen an erosion in their asset quality. The disruption in the industry is an opportunity for them to grab some market share."

In an interview this week, Bharat B. Masrani, chief executive of TD Bank, the US unit of Canada's Toronto-Dominion Bank, said his institution is well-positioned because it avoided making subprime loans and sold off other problematic investments to larger banks.

Masrani said TD Bank will proceed with plans to open more than 300 branches in Northeast markets such as Boston, New York, and Philadelphia. "Boston is a key market for TD Bank and our intention is to grow this market over the next few years," he said.

Anticipating a consumer flight to safety, especially by investors in uninsured mutual funds, some large and small Massachusetts banks already have begun introducing financial products with longer terms or higher interest rates.

For example, Eastern Bank of Boston last month rolled out a nine-month certificate of deposit paying 3.75 percent interest. The product has pulled in hundreds of millions of dollars in deposits from new and existing customers, said bank spokesman Joe Bartolotta.

"It's during times of turmoil when people stop and think about who they're banking with," Bartolotta said. "We're hoping that we're creating an opportunity to draw new customers to the bank."

Ross Kerber of the Globe staff contributed to this report. Robert Weisman can be reached at weisman@globe.com.