The US banking industry is bracing for trouble. After several years of favorable economic conditions and strong financial performance for US lenders, a number of challenges – many of them macroeconomic – now loom on the horizon. Management teams must address these challenges if they hope to keep profitability intact.
Large banks are somewhat insulated from the coming storm, because of their sheer size and the breadth of their portfolios. Regional banks, on the other hand, face numerous headwinds. Competition both from big banks and nontraditional lenders has increased. At the same time, the technology capabilities of regional banks generally lag those of big banks and fintech upstarts. As customers’ expectations are changing, regional banks must improve their service in order to compete.
One way that regional banks have dealt with challenging market forces in the past has been through consolidation. Mergers have brought many positive benefits over the years, from a larger customer base and broader product offerings to opportunities for cost reduction across the combined enterprise. Oftentimes, consolidation was seen as the first line of defense.
Now, with economic growth slowing and the yield curve having inverted, several analysts have suggested the industry is in the beginning stages of yet another wave of consolidation.
We disagree. The hurdles for consolidation in the coming months will be great, for numerous reasons. Years of technological improvements have created complex institutions that are likely to prove difficult to integrate without enormous focus and effort on the part of leaders and might not yield game-changing cost savings. What’s more, the number of remaining regional banks that are suitable for mergers based on size and geographic overlap has decreased, limiting opportunities for combinations.
In short, we believe the M&A bulls are too bullish.