Bank Mergers Heading for Seven-Year High, Pushed by Costly Rulesby
U.S. bank deals are on pace for the strongest year since 2009
Low interest rates, slow growth also seen driving combinations
Here’s an irony: U.S. regulators looking to avoid bailouts of too-big-to-fail banks have passed so many rules that regional and local lenders are combining to stomach the costs.
The result: Banks are bulking up.
Mergers and acquisitions by U.S. banks surged last year to about $18 billion, the highest level since 2009. This year, firms are set to fly past that mark, according to data compiled by Bloomberg. In nine of the 10 biggest deals completed in 2016, banks selling themselves cited heightened regulatory burdens as a driver, Securities and Exchange Commission filings show. The extension of low interest rates is compounding that pressure by eroding profits.
“It’s harder to grow earnings, grow revenue in the environment we’re operating in for all of the banks,” Huntington Bancshares Inc. Chief Executive Officer Steve Steinour said in an interview this week after his firm completed the takeover of FirstMerit Corp. “And there’s still more regulatory expectations and more burden, if you will, coming. Those factors will influence more combinations over the foreseeable future.”
To be sure, even the current pace of dealmaking isn’t likely to create more financial behemoths, like in the spree of mergers in the 1990s that led to the formation of global titans such as Citigroup Inc. and Bank of America Corp.
In part, that’s because those giants are so far ahead, with assets well over $1 trillion. Many smaller banks also aren’t eager to cross the $10 billion, $50 billion and $250 billion asset thresholds that trigger additional regulatory oversight under rules passed after the financial crisis.
“There’s a reluctance of banks to join the ranks of what we call systemically important financial institutions,” said Kip Weissman, partner with law firm Luse Gorman, which advises on deals. “A lot of banks that are $20 or $30 billion are reluctant to go to the $50 billion size.”
In an April speech, Federal Deposit Insurance Corp. Chairman Martin Gruenberg blamed a combination of slow economic growth and low interest rates for the consolidation of small banks. As for rules, he said regulators are careful to tailor supervision so that small, low-risk firms don’t face undue expenses. His agency also tries to provide technical assistance to community banks to ease their burden.
Because climbing to a higher regulatory tier can drive up compliance costs, firms that do it can feel pressure to grow even more. A bank crossing the $10 billion mark, for example, will probably need to reach at least $12 billion quickly to get an appropriate return, Chris McGratty, an analyst with Keefe Bruyette & Woods, said at a conference in July.
The regulatory pressures forcing small banks to sell can have an unfortunate effect on local economies, said Bill Hickey, a principal and co-head of investment banking at Sandler O’Neill.
“They’re the pillars in their communities,” Hickey said of the lenders. “When a community bank goes away, that generally is not a good thing.”
He predicts the surge in deals will continue unless interest rates start to improve for lenders.
“We’re going to see activity in the second half of this year that will outpace the second half of last year,” he said. “If the shape of the yield curve doesn’t change significantly, I think 2017 will be a big year for bank M&A.”
On Thursday, United Bankshares Inc. agreed to buy Cardinal Financial Corp. in a deal valued at about $912 million to build its presence around Washington. Last month, Pittsburgh-based FNB Corp. agreed to buy Yadkin Financial Corp. for about $1.4 billion to expand in the Carolinas.
“Regulation has been a story of unintended consequences and bureaucrats rarely getting anything right,” said Jeff Davis, managing director at Mercer Capital, a business valuation and advisory firm. After the crisis, the Federal Reserve “did what they had to do to get the system pieced together. The result of that is we ended up with some really big companies.”