|
|
Small U.S. banks may merge to beat millennium bug
09:48 a.m. Aug 21, 1998 Eastern
By Jennifer Westhoven
NEW YORK (Reuters) - Small and midsized U.S. banks may have to merge with larger rivals for safe haven from the millennium bug which threatens to crash computer systems and bring electronic commerce to its knees on January 1, 2000.
``The consensus is some small to midsized banks will feel pressure to put themselves up for sale,'' said Sally Pope Davis,
a Goldman Sachs & Co. banking analyst on a conference call addressing the Year 2000 issue.
A space-saving practice used by computer code writers has left many older systems with just two digits to recognize the year. That means many systems could misread the year 2000 as 1900, causing crashes or mass miscalculations.
Although big banks have aggressively tackled the software glitch and are now nearly ready for 2000, second-tier companies with less resources are less prepared, several studies have found.
Medium-sized companies may be the most vulnerable, Davis said. Small firms could likely revert to manual procedures in case of a systems crash. But trapped between those firms and the large banks flush with technology resources are the midsized banks, which have become highly reliant on their information technology (IT) systems.
Both Citicorp and Electronic Data Systems Corp. believe many small to midsized firms will ``recognize their fate'' by late 1998 or early 1999 and put themselves on the block, according to Goldman.
Goldman recently held a conference on banking and the Year 2000 issue in New York for clients.
``Regulators have been so adamant on this issue .... if it looks like a bank is not going to make it, they may be encouraged to sell,'' she said.
Davis does not expect a tidal wave of merger activity, however. ``It used to be a very broad feeling, but we haven't seen any such effect yet. There is likely to be some fallout, but perhaps not as dramatic as some are expecting,'' she said, noting that many banks already outsource a lot of processing work to vendors, which are likely to be millennium-compliant.
Although she did not name any merger candidates, she said super-regional banks would be the most likely buyers.
``A First Union, which is adept on technological issues, may
stand willing and able to step in,'' she said.
Goldman said super-regional banks such as First Union Corp. and NationsBank Corp. may be best-positioned for the computer bug in the banking world. Super-regionals are not as exposed to global risks as multinational banks, and their systems have been continuously upgraded during bouts of merger activity.
In a study, Goldman found that First Union's and NationsBank's total Y2K expenditures are likely to be less than one percent of 1997 revenues, while large multinational banks will spend far more. Citicorp will spend an estimated $600 million or 3.0 percent of revenues, J.P. Morgan & Co. will spend $250 million or 3.5 percent, and Bankers Trust Corp. will spend $230.0 million or 3.7 percent.
Companies that are Y2K-ready could also win customers away from banks that have not aggressively prepared. Chase Manhattan Corp. told Goldman at the conference that it might win such customers, although it said it has no plans to actively market against banks that are not Y2K compliant.
Copyright 1998 Reuters Limited. All rights reserved. Republication and redistribution of Reuters content is expressly prohibited without the prior written consent of Reuters. Reuters shall not be liable for any errors or delays in the content, or for any actions taken in reliance thereon.