ABA Banking Journal
No Result
View All Result
  • Topics
    • Ag Banking
    • Commercial Lending
    • Community Banking
    • Compliance and Risk
    • Cybersecurity
    • Economy
    • Human Resources
    • Insurance
    • Legal
    • Mortgage
    • Mutual Funds
    • Payments
    • Policy
    • Retail and Marketing
    • Tax and Accounting
    • Technology
    • Wealth Management
  • Newsbytes
  • Podcasts
  • Magazine
    • Subscribe
    • Advertise
    • Magazine Archive
    • Newsletter Archive
    • Podcast Archive
    • Sponsored Content Archive
SUBSCRIBE
ABA Banking Journal
  • Topics
    • Ag Banking
    • Commercial Lending
    • Community Banking
    • Compliance and Risk
    • Cybersecurity
    • Economy
    • Human Resources
    • Insurance
    • Legal
    • Mortgage
    • Mutual Funds
    • Payments
    • Policy
    • Retail and Marketing
    • Tax and Accounting
    • Technology
    • Wealth Management
  • Newsbytes
  • Podcasts
  • Magazine
    • Subscribe
    • Advertise
    • Magazine Archive
    • Newsletter Archive
    • Podcast Archive
    • Sponsored Content Archive
No Result
View All Result
No Result
View All Result
ADVERTISEMENT
Home Economy

Why Bank Consolidation in the U.S. Will Lift Off in 2016

March 9, 2016
Reading Time: 4 mins read

By Christopher D. Wolfe

With all the discussion surrounding the Federal Reserve’s recent interest rate lift-off, consolidation in the banking sector is also set to accelerate. Listening to earnings calls and analyst presentations, you can feel the bank M&A in the air as management teams are increasingly stating their desire to pursue attractive opportunities. To underscore this point, a few large deals were announced towards the end of 2015: Key Corp’s announced acquisition of First Niagara, and New York Community Bank’s announced acquisition of Astoria Financial. These came on the heels of regulatory approval for M&T’s long-delayed acquisition of Hudson City, signaling that bank M&A may start to take off.

While there has been a long-term secular trend towards consolidation in the banking sector—with 4,810 fewer banks now than in 1994—looking ahead, consolidation will be driven anew by the confluence of higher fixed regulatory costs, the low-growth and resulting low-interest-rate environment and rapidly changing technological and financial innovation. Taken together, these forces have contributed to structurally lower profitability for the industry as a whole versus pre-crisis levels. Moreover, some banks will struggle to consistently earn their cost of capital.

The U.S. is unique among large developed countries in terms of the sheer number of banks. By way of contrast, Canada gets by with just six major banks. Although in terms of assets, the U.S. banking industry is modestly concentrated, with approximately 50 percent of assets held by the 10 largest commercial banks, it remains highly fragmented with more than 5,410 commercial banks and 860 savings institutions as of late 2015. The fragmented nature of the industry reflects historical policy choices, such as the lack of interstate branching up to 1994.

In the aftermath of the financial crisis, aside from failed bank deals, meaningful M&A transactions were few and far between, as banks nursed their balance sheets and stock prices back to health. Now that this is mostly accomplished, many are positioned to pursue long-sought strategic opportunities. The urge to merge is often meant to address key product or footprint gaps. The promise of greater efficiencies from scale has not always met reality, as bank efficiency ratios for even some of the largest banks remain stubbornly high (around 65 percent for the largest banks).

Higher fixed regulatory costs. No matter how you slice it, banks will contend with higher fixed regulatory costs. This mainly reflects the expenses associated with implementing Basel III and Dodd-Frank Act requirements such as stress testing, along with building out compliance functions, notably around Bank Secrecy Act and anti-money laundering, as well as overall consumer compliance. Despite well-intentioned legislative efforts to shield smaller banks from the more onerous new laws and regulations, smaller banks have been contending with “trickle down” regulation, as they too are subject to heightened expectations meant for larger banks.

Low interest rates for longer. The pervasive and exceptionally low interest rate environment has put significant pressure on bank net interest margins. Bank margins fell to 3.02 percent in the first quarter of 2015, the lowest average net interest margin since 1984 according to the FDIC. While banks have laid out and executed on cost cutting plans in response to the low interest rate environment, pressure on earnings will intensify absent a meaningful rate rise by the Fed. Now that the Fed has followed through on its first rate rise in nearly a decade, future rate increases will likely be measured. Higher NIMs and profitability from a rate increase may thus continue to be pushed out into the future. Moreover, banks will need a steepening yield curve in order to genuinely benefit from rate rises. What is sometimes overlooked is that interest rates have been on a fairly steady long-run decline since the early 1980s, pocketed by a only a few up cycles over that time period. Looking at the last Fed tightening cycle from 2004-2006, bank NIMs failed to expand.

Technological and financial innovation. Against these other challenges, banks are confronted with rapidly changing technology and financial innovation. This is coming in many forms, such as digital wallets from deep-pocketed technology companies to competition from alternative nonbank lenders. Alongside this, banks need to continually invest in their own customer experience through better internet and mobile platforms in order to attract and retain new customers. This is especially important in the face of changing demographics, as younger customers are more accustomed to transacting online. All this technological change is happening against the backdrop of growing cybersecurity risks, which will also require ongoing investment to stay ahead of potential threats.

While new and greater use of technology offers tremendous opportunities to improve badly needed efficiencies, it requires significant upfront investment at a time when earnings are already pressured. Banks are countering some of this innovation by partnering with nonbank fintech lenders and participating in technology consortiums to stay on top of developments. Nonetheless, the cost associated with all this technological and financial change may also incentivize more M&A among banks in order to spread the costs across a larger expense base.

Weighed against further consolidation is the tougher regulatory approval process that deals face. Regulators expect that any acquisitions are fully regulatory compliant the day the transaction closes, which may put off potential acquirers. Nonetheless, bankers reading regulatory tea leaves are concluding that M&A can indeed proceed, provided the acquirer has performed solid due diligence and can present a clear integration road map to regulators.

Consolidation will likely be focused among non-systemically important banks as they seek scale to address all these associated costs and challenges. Large regional banks, defined as those over $50 billion in assets, could also be active in M&A as these entities have already met the hurdles of rigorous stress testing and other capital and liquidity requirements and could now leverage these capabilities.

While M&A is likely to pick up, not all transactions will ultimately be unqualified successes. In fact, M&A has been the undoing of some banks which have overpaid or failed to realize expected synergies. Moreover, regulators have taken a jaundiced view of “serial acquirers.” Having said that, further consolidation could make the industry stronger, as more regional banking organizations provide solid competition for the largest banks while retaining the competitive strengths typically associated with smaller institutions.

Christopher D. Wolfe is a managing director in Fitch Ratings’ financial institutions group. His responsibilities include overseeing the ratings and analysis on U.S. banking institutions. He is also a member of Fitch’s corporate finance criteria committee.

ADVERTISEMENT
Tags: Basel IIICybersecurityDodd-FrankFintechInterest rate riskMergers and acquisitionsRegulatory burden
ShareTweetPin

Author

Monica C. Meinert

Monica C. Meinert

Monica C. Meinert is a senior editor at the ABA Banking Journal and VP for executive communications at the American Bankers Association.

Related Posts

BAFT releases report on best practices, guidance for ISO 20022 migration

ABA offers fixes for small-business lending data collection rule

Commercial Lending
July 18, 2025

In a letter, ABA said it is pleased with the CFPB's proposal to revise its small-business lending data rule and offered several recommendations to reduce the compliance burden for banks.

Retail sales decreased 0.8% in January

ABA DataBank: Retail sales rebounded in June

Economy
July 18, 2025

Despite recent softening and apprehension over price increases, consumer spending was robust over the month.

Consumer Sentiment declined in April

Consumer sentiment rises in July

Economy
July 18, 2025

The University of Michigan Consumer Sentiment Index increased 1.8% in July compared to the month prior, landing at 61.8, according to preliminary results for the month.

ABA points to role of regulators in discouraging bank engagement in digital assets

ABA, associations urge OCC to postpone crypto firm applications for bank charters

Newsbytes
July 18, 2025

ABA joined four banking and credit union associations in raising concerns about a push by digital asset firms to establish national trust banks, saying there are significant policy and legal questions as to whether the applicants' proposed business...

Housing starts rise in June

Housing starts edge up in June

Economy
July 18, 2025

Privately-owned housing units authorized by building permits in June increased to a seasonally adjusted annual rate of 1.397 million, according to the U.S. Department of Commerce.

ABA, associations urge lawmakers to finalize deal on debt ceiling

House passes bills on stablecoins, digital assets, CBDCs

Cybersecurity
July 17, 2025

The House voted in favor of two bills to create a regulatory framework for payment stablecoins and digital assets. House members also voted in favor of a separate bill to ban the Federal Reserve from issuing a CBDC.

NEWSBYTES

ABA offers fixes for small-business lending data collection rule

July 18, 2025

ABA DataBank: Retail sales rebounded in June

July 18, 2025

CFPB to keep notification procedures for state enforcement of consumer law

July 18, 2025

SPONSORED CONTENT

Navigating Disruption in Ag Lending – Why Tariffs Are Just the Tip of the Iceberg

Navigating Disruption in Ag Lending – Why Tariffs Are Just the Tip of the Iceberg

July 1, 2025
AI Compliance and Regulation: What Financial Institutions Need to Know

Unlocking Deposit Growth: How Financial Institutions Can Activate Data for Precision Cross-Sell

June 1, 2025
Choosing the Right Account Opening Platform: 10 Key Considerations for Long-Term Success

Choosing the Right Account Opening Platform: 10 Key Considerations for Long-Term Success

April 25, 2025
Outsourcing: Getting to Go/No-Go

Outsourcing: Getting to Go/No-Go

April 5, 2025

PODCASTS

The future of careers in risk and compliance

July 17, 2025

Breaking down the bank-related provisions in the big budget bill

July 10, 2025

Podcast: Inside ABA’s new Treasury Check Verification System API

June 25, 2025
ADVERTISEMENT

American Bankers Association
1333 New Hampshire Ave NW
Washington, DC 20036
1-800-BANKERS (800-226-5377)
www.aba.com
About ABA
Privacy Policy
Contact ABA

ABA Banking Journal
About ABA Banking Journal
Media Kit
Advertising
Subscribe

© 2025 American Bankers Association. All rights reserved.

No Result
View All Result
  • Topics
    • Ag Banking
    • Commercial Lending
    • Community Banking
    • Compliance and Risk
    • Cybersecurity
    • Economy
    • Human Resources
    • Insurance
    • Legal
    • Mortgage
    • Mutual Funds
    • Payments
    • Policy
    • Retail and Marketing
    • Tax and Accounting
    • Technology
    • Wealth Management
  • Newsbytes
  • Podcasts
  • Magazine
    • Subscribe
    • Advertise
    • Magazine Archive
    • Newsletter Archive
    • Podcast Archive
    • Sponsored Content Archive

© 2025 American Bankers Association. All rights reserved.