* Banks with low payout ratios may be hunting deals
* U.S. Bancorp sees "amazing" growth opportunity
* PNC Financial seen "ready to go" on next acquisition
NEW YORK, March 16 (Reuters) - Banks did not have to spell out long-range acquisition plans to the Federal Reserve in their stress test scenarios, but investors are scrutinizing test results released this week for hints.
Attention in recent days has focused on the host of dividend increases and stock buybacks announced after the Fed ruled on the capital plans of 19 large U.S. banks. But analysts are drilling down to determine if the level of payout ratios -- the amount of projected profit a bank is spending on dividends and buybacks -- signals which banks may be saving up for acquisitions.
"To acquire an attractive new franchise, a U.S. bank has to reassure regulators that they can fund the new acquisitions and still meet worst-case stress tests," Sanford Bernstein analyst Brad Hintz wrote Reuters in an e-mail. "Not raising dividends could well imply a management team that wishes to go shopping."
The test results go a long way toward establishing that major super-regional banks, including Minneapolis-based U.S. Bancorp and Pittsburgh-based PNC Financial Services Group, are well-capitalized companies with strong appetites for acquisition. PNC has a low payout ratio and U.S. Bancorp boasts that even with newly raised dividend and buyback programs it can deploy capital on acquisitions.
PNC, which this month closed on its purchase of about 400 Royal Bank of Canada branches in the southeastern United States, is focused on integrating the branches but continues to "look at stuff all the time," Senior Vice Chairman William Demchak said on March 8 at an investor presentation.
"Most of the smaller institutions that come onto the market have fairly troubled balance sheets, still," he cautioned. However, one investment banker who has worked with PNC said, "Now that they've got the big Southeast deal behind them they're ready to go" on future acquisitions.
A bank spokesman declined to comment.
PNC, which has more than $271 billion of assets, said last week it would recommend to its board a "modest share repurchase" program and an unspecified dividend increase.
It now returns a below-average 37 percent of its net income to shareholders through dividends and buybacks, according to an analysis of the bank stress tests by Nomura Securities, well below the 90 percent and greater payouts planned by such banks s as JPMorgan Chase & Co and State Street Corp, according to an analysis by Nomura of post-stress test capital announcements.
U.S. Bancorp, which has more than $340 billion of assets, has been less subtle than PNC in signaling its growth intentions.
"We're the fifth-largest commercial bank in America, but we're not even close to 10 percent of anything," U.S. Bancorp Chief Executive and Chairman Richard Davis said at Citigroup's banking conference earlier this month, referring to the regulatory cap on deposit share. "We've got so much opportunity it's just amazing."
He said the bank aims to pay 60 percent to 80 percent of its earning in dividends and buybacks but added a proviso. "Should there be an opportunity of any size then we'll evaluate that," he said. "The buybacks are something you can stop and start as quickly as you'd like."
A bank spokesman declined to elaborate.
In the past four years U.S. Bancorp has bought more than 10 credit card and payment systems portfolios in the United States and Mexico worth $3.2 billion, eight consumer and wholesale banks with $30 billion of loans and another $30 billion of deposits, and seven corporate trust and mutual fund servicing divisions with $1.1 trillion of assets from other banks.
BB&T Financial, based in Winston-Salem, North Carolina, is another bank that could be in the mix for acquisitions. Largely an agglomeration of community banks, it is currently negotiating the purchase of Florida's BankAtlantic Bancorp and the life and property & casualty insurance units of Crump Group -- deals included in its capital plan to the Fed.
Though the bank said in a statement that it is "among industry leaders in dividend yield among S&P 500 banks," Nomura said its combined dividend/stock buyback yield is a low 30 percent of projected 2012 earnings.
Michael Rose, an analyst at Raymond James Financial, wrote in a report to clients that BB&T, which announced a 25 percent quarterly dividend hike to 20 cents a share after passing the stress test, remains interested in "strategic opportunities."
Regulators, to be sure, under political pressure to reduce systemic risk and restrict rampant growth at banks, are putting both large and small acquisition requests under tighter scrutiny. It took almost eight months for the Federal Reserve to approve Capital One's $9 billion acquisition of Dutch bank ING's American online banking business, ING Direct, a relatively straightforward deal, said merger bankers. The transaction was approved last month.
"An M&A transaction is a whole separate order of magnitude from dividend raises and buyback increases, adding potential operational risk on top of the capital implications of taking on another balance sheet," said Herb Lurie, senior managing director of the financial institutions group at Guggenheim Securities. "The regulators are being very careful about dotting every 'i' and crossing every 't' to address concerns about the perceived size and complexity of the larger banks."
Lurie, nevertheless, said that the ability to cut costs at a time when revenue growth is hard to come by remains a compelling argument for bank mergers over the next 24 months.
In addition to scrutinizing whole-bank purchases, potential acquirers may be sizing up the U.S. assets of capital-hungry European banks.
Investors are hearing that State Street Corp and Bank of New York Mellon Corp are reviewing the global custody units of French banks BNP Paribas and Societe Generale , according to Bernstein's Hintz. A spokesman at Societe Generale declined comment but noted that it has a nonequity "commercial" alliance with U.S. Bancorp for servicing shareholders of U.S.- and European-domiciled funds.
A BNP Paribas spokeswoman did not immediately respond. Spokespeople at Bank of New York and State Street said the banks do not comment on market rumors.
Merger bankers say the one near-certainty in the M&A game is that the six biggest U.S. banks -- JPMorgan Chase, Bank of America Corp, Citigroup, Wells Fargo & Co, Goldman Sachs Group and Morgan Stanley -- won't be participants.
The traditional commercial banks among them are bumping up against 10 percent market-share limits on deposits and all are constrained by the need to raise more capital and by political opposition to megabanks. (The exception may be Wells Fargo, which has room for one more medium-sized bank acquisition, several bankers said.)