WHEN CASH IS KING AT CORPORATIONS, BANKS SEE GREEN, TOO

WHEN CASH IS KING AT CORPORATIONS, BANKS SEE GREEN, TOO

The record cash levels of corporate America will have reverberations across the banking industry in the coming months, from the behemoths to the community banks, according to industry watchers.

The impact on the bigger banks is obvious: They will see more demand from corporate clients undertaking M&A and expansion initiatives, says Howard Silverblatt, senior index analyst at Standard & Poor's. The story with the smaller banks is more complex, with some observers calling for a significant shift in strategy among those institutions as they try to glean the benefits of these piles of cash.

And to be sure, there are piles. The cash reserves of S&P industrial 500 1/2rms stand at $642 billion, says Silverblatt, a 146 percent increase over the 1999 level of $261 billion. Even more telling: The current level is 7.4 percent of the market capitalization-or aggregate market value-which Silverblatt described as a signi1/2cant level. The last time the percentage was that high was 1988, according to his statistics.

Mid-sized and community banks won't be able to lure the splashy M&A business, but they will see a big opportunity to offer cash management, says Jeff Tintle, svp, client and advisory services at Baker Hill, a technology and consulting 1/2rm.

Historically, cash management has been the realm of a small handful of large banks that have the scale to make the high-volume, low-margin business successful. But now, as a result of all the cash that companies have to manage, Tintle sees a "unique opportunity" for smaller banks to bolster their presence in this market.

Community banks that will win in this arena are the ones that take a holistic view of their customers, Tintle says, which is not something most do. "A lot of community lenders look solely at the loan and the risk involved," he says of the traditional way of doing things. But that won't cut it anymore. The various groups within a bank need to work together with the client's best interest as their ultimate driver, which can be difficult to achieve even when everybody recognizes it as the ideal business model. "It's a problem of culture," he says.

But it's not simply a matter of trying to get the full bene1/2t of the amount of cash in play, he says. It comes at a crucial competitive time when large banks are already mitigating the advantage of community banks. "Big banks have long been accused of being too distant, but we're seeing them become more relationship-oriented and taking away some of the advantage [of community banks]," he says.

For the big banks' part, they will see more corporate customers looking to step up M&A and organic growth, says Jim Callahan at research 1/2rm Morningstar.

Silverblatt agrees, saying that there is so much cash that companies "won't be able to spend it fast enough." For the past couple of years, firms have been content with spending their cash on buying back their own stock, but now they are going to be looking to do bigger deals, he says.

In this corporate environment, after several years of improving efficiency, they will be looking to increase the top line, he says, and the two main ways of doing that are expansion or acquisitions. Though necessary for business, both have negative connotations domestically, he says. Much of the expansion will be overseas, which often stirs up negative feelings here in the U.S. And on the M&A front, there are always layoffs. "Somewhere on that press release, you'll 1/2nd the word 'synergies,'" he says.

Silverblatt sees a signi1/2cant difference among industries in terms of their cash on hand. Technology has the highest percentage of market capitalization in cash, at 12.6 percent; consumer staples have 3.75 percent; and industrials lag, with just 3.19 percent.

Among individual companies, Exxon has the biggest cash pile, says Silverblatt, with $36.5 billion. Microsoft is right on its heels, with $35 billion, and consumer goods company Johnson & Johnson comes in a distant third, with $17 billion.

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