Bank mergers again
A few days ago, I wrote about how consolidation would be good for the US banking industry. In a business where economies of scale are important, fixed costs are high and where competition from non-banks is increasing, “join or die” is only a slightly exaggerated motto for regional banks. And US bank regulators appointed by Trump have signalled their willingness to wave acquisitions through quickly. Properly executed, consolidation might help end years of unhappiness for regional bank investors:
“Properly executed” is the critical phrase there. As we noted, the last regional bank megadeal, which fused BB&T and SunTrust into Truist, has not worked at all well. The stock is flat since the merger was announced in early 2019:
So the question is, what is the right way to consolidate? In the earlier piece, I noted how one problem was some regional bank bosses’ unwillingness to sell and give up their cushy perch. But, having spoken to several industry insiders, it seems that is only half the problem. Many bank CEOs and boards are too keen to do acquisitions and end up either paying too much, or buying the wrong things. It is easy to see how the two problems would feed off each other: unwillingness to sell reduces the number of sensible targets, which drives hungry acquirers into worse deals.
Leaders of acquiring banks are tempted to do bad deals because running a big bank pays better than running a small bank. Here is a chart from Barclays showing the correlation between bank assets and CEO pay:
So there is an incentive to accumulate assets, and acquisitions are a fast way to do that. But acquisitions have to be paid for, and the standard acquisition currency is newly issued shares of the acquirer. If the value paid for the target bank, in terms of the net asset or “book” value of each acquirer share, is higher than the value of the acquiring bank, the result is a bigger bank, each share of which is worth less (in the jargon, this is “tangible book value dilution”). The CEO wins; investors lose.
Buyers promise that taking out redundant costs will increase earnings, so their per-share value will recover in a few years. Sometimes this happens; more often it does not. HoldCo Asset Management, an activist investment house specialising in banks, has come to prominence lately for urging Comerica to sell itself to Fifth Third. But more often, rather than pushing banks to sell, HoldCo pushes banks to stop buying. Last year, for example, it urged the leadership of Columbia Banking System to “swear[] off any and all future acquisitions” and “publicly express [the] intention to use all excess capital . . . above its target capital ratios to buy back shares”.
It is not just tangible book dilution that makes good deals scarce. Another problem pointed out by HoldCo in its activist campaign slide decks is the cost of deposits. Too often, buyers pay up to buy another bank and its deposits, when the cost of the acquired deposits is higher than the buyer’s own. This increases assets but compresses profitability.
Once these and other financial hazards are overcome there is the hard work of integrating two banks’ cultures and technology systems, and the pain of firing a lot of people. Truist employed 38,000 people as of a year ago; that is 20,000 fewer than BB&T and SunTrust combined employed at the end of 2018. And integration, rather than financial mechanics, is where the Truist deal appears to have come to grief. Ebrahim Poonawala, bank analyst at Bank of America, told me that “in hindsight, the two banks had very different cultures”. In the hurly-burly of integration, lots of good bankers left and Truist lost market share in both loans and deposits to competitors. It is hard to see how much corporate cultures matter until you try to mix two of them.
The more I think about bank mergers, in short, the harder they look. But the industrial logic remains, the regulatory window will be open for at least a few more years and the economic backdrop is solid. As this chart from Bank of America shows, bank M&A picked up in 2025, and Poonawalla expects it to do so again in 2026:
More bank consolidation is needed, and more bank mergers seem likely. It is less clear whether the deals will make shareholders, and not just bankers, any richer.