Feb
19
Mergers that don’t make national news might create the impression that bank M&As aren’t frequent. The opposite is true. Last week, the Federal Reserve listed 163 pending financial institution merger or acquisition applications. And that’s just in the United States.
But some mergers have caused buzz, like the planned mergers TCF Bank with Chemical Bank, Fifth Third Bancorp* with MB Financial Inc., SunTrust with BB&T, and Alibaba’s Ant Financial’s pending takeover of Worldfirst.
As reported by Bloomberg, Bank of America CEO Brian Moynihan suggested at last month’s World Economic Forum in Switzerland that the merger trend may produce new megabanks:
“How does somebody emerge? The same way we emerged,” Moynihan said. “The emergence will come out of the consolidation of another round of people which still has to happen in the United States. There are now 6,000 odd banks, and you’ll find them continuing to consolidate.”
In the same Bloomberg article, Citigroup Inc. CEO Michael Corbat referred to the current trend in mergers as a “deal frenzy” and suggested a catalyst: “In the U.S. today, there’s probably not much appetite for the big banks to get bigger.” To Corbat’s point, limiting the size of top-tier banks in terms of size may lead to the creation of new global contenders via mergers of penultimate-tier banks.
Not surprisingly, Senator Elizabeth Warren is not thrilled. Her recent letter to the Federal Reserve System’s Jerome H. Powell all but accuses the Fed of dereliction by “… summarily approving mergers.” But it’s no secret that Warren tends toward a binary view when it comes to banking. In one of her infamous senate committee grillings, she accused, “Cross-selling isn’t about helping customers get what they need,” but is all about “pumping up” stock prices.
Warren should know better than to argue all-or-nothing. Of course cross-selling can help stock prices, not to mention benefit banks in other ways. Yet for many if not most banks, better helping customers is implicitly and often explicitly understood as a vital condition. That cross-selling can help banks and customers is what we call non-zero-sum or win-win, an outcome that Warren seems not to acknowledge.
Non-zero-sum outcomes
Likewise, bank mergers and consolidations can accrue benefits to financial institutions and customers alike.
Containing costs may be the bank’s most obvious benefit. Consolidation means that only one, not two banks must meet the considerable expenses of regulatory demands and keeping up with technology. To be sure, cutting such costs nearly by half benefits banks, but it also benefits customers. As with any business, a bank’s costs are its customers’ costs. The fewer a bank’s costs, the fewer costs it must pass on to its customers.
Consolidation offers banks a fast, often lower-cost route to customer acquisition. The risk lies in whether acquired clients will prove profitable. Usually, the risk pays out, resulting in a stronger single institution than either component institution was on its own. Strength portends well for banks, but also for customers, and, for that matter, for economies in general. Safe banks are rather a good thing for everyone, customer or not.
Merging entities may profit from one another’s areas of strength, at the same time bringing one another’s areas of strength to their respective customer bases. SunTrust and its clients alike must surely be pleased to get their hands on BB&T’s digital banking app, which the 2018 MagnifyMoney Mobile Banking App Ratings ranked “best app among the ten largest banks.”
Consolidation can provide an economic boon to municipalities that wind up being home to a new, merged bank’s headquarters. The Detroit News’s Briana Noble wrote:
A proposed merger announced Monday between Chemical and TCF banks is expected to bring more jobs to the city, grow the tax base and expand philanthropic work being done to aid in Detroit’s recovery …
Gov. Gretchen Whitmer said the announcement is good news for the economy and the state’s future … “If we’re going to ensure Michigan’s success, we’ve got to attract more businesses to create jobs and boost the local economies in cities like Detroit,” Whitmer said in a statement. “This merger will create hundreds of jobs in the city, help local businesses attract the talent they need to thrive and provide investment throughout the state. I’m excited to work with everyone who wants to build a Michigan where more businesses move to for opportunity.”
Granted, consolidation can bring casualties in the form of branch closures and resultant job loss. In no way do I wish to trivialize the impact of such at the individual and family level. But I must also acknowledge the overall positive effects of mergers and acquisitions in the banking industry. Otherwise, Adam Smith’s “invisible hand” would have brought them to an abrupt halt centuries ago.
In place of “deal frenzy,” perhaps a more accurate and positive term might be “mutual strengthening opportunity.” Either way, the trend is sure to continue. In our business, mergers have been and likely will continue to be a way of life.
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*Who thinks up these names?