DEALTALK-Bank buys take backseat amid capital drives

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By Paritosh Bansal

NEW YORK, April 23 (Reuters) - Not so long ago a company's decision to explore "strategic alternatives" was good news for shareholders. Not anymore -- at least not for banks.

Takeovers among banks that offer a premium have become few and far between as strategic buyers appear to shy away from deals and private equity firms seem reluctant to expose themselves to regulatory scrutiny by controlling banks or thrifts.

Banks are feeling the squeeze as the housing downturn and slowing U.S. economy pummel profits, worried regulators urge them to shore up their balance sheets, and markets get skittish at the first signs of weakness.

Finding themselves with little room to maneuver, banks are raising capital at a discount and at the expense of shareholders, and experts say that is how things are likely to be for some time to come.

"People are afraid to catch a falling knife," said Ronald Hermance, chief executive of Hudson City Bancorp Inc (HCBK.O: Quote, Profile, Research), which runs one of New Jersey's largest banks. "In this kind of environment, you can't imagine that there's a gem sitting out there cheap."

This month alone banks such as National City Corp (NCC.N: Quote, Profile, Research), Wachovia Corp (WB.N: Quote, Profile, Research) and Washington Mutual Inc WM.N have sold shares at a discount.

National City, which had said it was exploring strategic alternatives and drew interest from rivals like Fifth Third Bancorp (FITB.O: Quote, Profile, Research) and others, eventually agreed to sell a stake at a discount to private equity firm Corsair Capital and other investors to raise $7 billion.