Best of Lex Midweek: US lenders’ urge to merge

Dear readers,

Like paying $5 for a small latte or $13 for a pack of cigarettes, cash-only restaurants are one of those annoying facts of New York city life. Restaurateurs blame high rent and soaring business costs (tax evasion may be a more plausible explanation). Either way, if the plan is to grab a cheap bite in one of the city’s outer boroughs, pre-dinner cash runs are de rigueur. One recent ATM visit inspired discussion of regional banks.

My friend, a western Pennsylvania native, still banks at PNC Financial, a Midwestern banking powerhouse. The number of PNC branches and ATMs in New York can be counted on one hand. Wouldn’t it make more sense to open an account with one of the big main street banks such as Citi or Chase and take advantage of their national network of branches and ATMs? The friend claims she is too lazy to switch. She doesn’t really need to. Most of her banking can be done online these days. Plus, PNC’s no-fee cash withdrawal policy means she can use any ATM anywhere. 

The staying power of regional banks is something to think about this week as the US bank earnings season gets under way. As always, the focus will be on the performance of the big banks: JPMorgan Chase, Citigroup, Goldman Sachs, Morgan Stanley, Bank of America and Wells Fargo. 

But regional players, which finance many of America’s small and midsized businesses, should not be overlooked. Of these, the 10 largest have combined assets of more than $2tn.

Investment in technology, reliable customers and steady loan and deposit growth have helped the shares gain an average of 28 per cent in 2019. 

The sector has not been immune from the squeeze of low rates. But higher non-interest income — or revenue from businesses that are not as sensitive to interest rates such as mortgage lending and banking services — has helped soften the blow to net interest margins. 

The sector’s share price resilience is also being boosted by M&A fever. A bank relief law passed in 2018 raised the threshold for financial institutions to be considered systemically important from $50bn in assets to $250bn. For smaller banks, the change means they can join forces and reap the benefit of cost savings without worrying about triggering stricter oversight by the Federal Reserve. Bigger regional players, whose assets are already around the $250bn mark, have little to lose from scaling up further. 

In November, two southern banks, First Horizon National and Iberiabank, agreed to combine in an all-stock deal to create a regional leader with $75bn in assets. Nine months earlier, BB&T snapped up SunTrust Banks for roughly $28bn, making it the biggest US bank deal since the financial crisis.

The pressure on regional banks to consolidate is real. To survive against giants such as JPMorgan and BofA, they need to invest more in technology such as smartphone apps and mobile banking tools. Linking up with a rival allows resources to be pooled while also helping cut down overall costs for compliance and cyber security. 

This year is likely to herald yet more deals among regional lenders.

Enjoy the rest of your week,

Pan Kwan Yuk
Lex writer