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Two Giants Vie for Bank in Chicago

Like deep-dish pizza, the Cubs and a mayor named Daley, LaSalle Bank has long been a Chicago institution. But until a few weeks ago, few would have called it a global banking prize.

LaSalle is at the center of what could be the biggest bank deal ever, as a trophy for at least two banking titans: Bank of America and the Royal Bank of Scotland.

LaSalle is attractive to both banks for similar reasons. Its longstanding ties to small and midsize business customers in Chicago and Midwest have given it a strong cash management and commercial lending franchise. And with few opportunities to gain a large foothold in the Chicago market, buying LaSalle — whose 135 area branches make it one of the area’s top players — may be the most efficient way to gain size.

“If you have national or global ambitions, this is the third most important city in the country,” said Paul M. McCarthy, chairman and chief executive of Marquette Bank, a community bank with 26 offices in the Chicago area. “There are only a few ways to get here, and this is the only apparent one.”

LaSalle was put in play after its Dutch parent, ABN Amro, agreed to sell itself to Barclays of Britain for $88 billion but carved out and sold the Chicago franchise to Bank of America in an effort to thwart rival bids. Last week, a group of buyers led by the Royal Bank of Scotland submitted a $98 billion offer for ABN and over the weekend signaled its desire to snap up LaSalle Bank.

Bank of America insists that it has a firm contract in place to buy LaSalle for $21 billion and is forging ahead with its takeover plans. But ABN shareholders have been calling for a separate vote that could derail the deal. A Dutch court is expected to weigh in later this week.

But the Royal Bank of Scotland group is considering submitting a higher bid for LaSalle, making their offer conditional on securing ABN Amro, said a person close to the banking consortium. For Bank of America, an acquisition would fill an important gap in its nationwide branch network. With more than 191 Chicago area branches flying under the Bank of America flag, the deal would transform it from a tiny player to one of the area’s largest banks.

The possible deal also comes as Bank of America’s revenue growth has been slowing and expenses are on the rise. With its deposits nearing the federal cap, it chief executive, Kenneth D. Lewis, has said that he would like to focus more on internal growth. Still, Bank of America, long an acquisition machine, may need another big deal to regain its step, several Wall Street analysts said. Even if it pays a healthy premium, the bank could find opportunities to improve the management of its branches and easily flush out costs.

For the Royal Bank of Scotland, which already has a 4 percent market share in the Chicago area through its Charter One franchise, the deal would give it a much bigger presence to expand.

“They face the same challenges that all foreign banks have faced in the United States,” said Bert Ely, a banking analyst. “They have made a lot of acquisitions and grown well, but long-term, they want to bulk up.”

Other banks may have similar plans. Charles O. Prince III, Citigroup’s chief executive, said earlier this month that the company had been looking for opportunities to expand in the Midwest, though many feel the company, which has begun an overhaul, has too much on its plate to handle a deal of this size. And banking analysts have tossed up names of other possible LaSalle buyers: National City, KeyCorp and JPMorgan Chase are at the top of the list.

“It’s a jump ball,” said David Hendler, a banking analyst at CreditSights, an independent research firm in New York. “There are just not a lot of clean, single-purpose banks to do it with.”

Not all analysts find LaSalle — whose $122 billion in assets makes it the 17th largest bank in the United States— such a prize.

“The guy who wins it will probably wind up losing,” said Richard X. Bove, a banking analyst with Punk Ziegel & Company. “It’s hard for me to understand why everybody wants it. Almost half the bank is in Michigan and there is a big chunk in Detroit. And what they are doing in Chicago on the retail side is not all that impressive.”

Still, most Chicagoans have considered LaSalle their hometown bank since it was founded in 1927. Located on LaSalle Street in the heart of the city’s financial district, it has been a pillar of Chicago commerce and of the community. The bank is a sponsor of the Chicago Marathon and is a big supporter of the arts.

More important, LaSalle is one of the few Chicagoland branch networks left. Until the early 1980s, Illinois state banking laws put severe restrictions on establishing branch offices. That left Chicago with hundreds of small independent banks with a handful of offices but few with a branch footprint that extended across the region.

Even today, with the exception of JPMorgan Chase and Bank of Montreal’s Harris Bank, no other retail bank besides LaSalle has more than a 4 percent share, according to Mercer Oliver Wyman Research. And most have less than a 1 percent share.

By contrast, in New York City, at least seven big banks have control more than 4 percent of the retail banking market.

Because the Chicago market is so fragmented and competitive, it is extremely difficult for new entrants to gain share.

“What it comes down to is that a lot of players have tried organic growth strategies,” said Michael Polous, the head of Mercer’s Oliver Wyman’s retail bank consulting practice. “Almost all of them have broken their sword.”

Julia Werdigier in London contributed reporting.

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