(Bloomberg Opinion) — Regional U.S. banks are having something of a moment.
After M&T Bank Corp. agreed last week to buy People’s United Financial Inc. in an $7.6 billon all-stock deal, the KBW Regional Banking Index extended its sharp climb to a record. The deal follows others in recent months, such as Huntington Bancshares Inc.’s purchase of TCF Financial Corp. for about $6 billion and PNC Financial Services Group Inc.’s acquisition of Banco Bilbao Vizcaya Argentaria SA’s U.S. banking operations for $11.6 billion. Bloomberg News has also reported that Texas regional bank Cadence Bancorp is exploring a sale. All told, the regional banking index is up 27% this year, outpacing the 19.7% advance for the broad KBW Bank Index, which includes the largest financial institutions such as JPMorgan Chase & Co., Bank of America Corp. and Citigroup Inc.
While it might seem heartwarming that smaller banks have notched a stronger comeback since the pandemic roiled global markets, it’s not clear the hype is entirely deserved. Sure, consolidation is necessary for survival — “Darwinian banking at work,” in the words of Mike Mayo, an analyst at Wells Fargo & Co. But is the prospect of regional banks staying alive worth such a sharp jump in the first two months of 2021?
Just take this quote from M&T Chief Executive Officer Rene Jones, who will lead the combined company:
Huntington CEO Steve Steinour made similar remarks. “Together we’re in a position to do things that neither one of us could independently do,” he said in December. “You get scale.”
The thing is, megabanks like JPMorgan are already ahead of them on every front — and have no intention of slowing down. The largest U.S. bank said in its earnings call last month to expect higher costs this year, driven precisely by investments in technology, marketing and market expansion. CEO Jamie Dimon called investments “the best and possibly highest use of our capital.” Chief Financial Officer Jennifer Piepszak said at a virtual investor conference last week that there’s “perhaps a greater sense of urgency” for the bank to find acquisition targets as competition intensifies from financial-technology firms.
It’s not exactly a secret why JPMorgan feels compelled to invest — it’s getting bigger in a hurry. The bank’s assets grew by a stunning $699 billion in 2020, an amount alone that would represent the seventh-largest U.S. bank or bank holding company, according to data from the Federal Reserve Bank of New York. M&T is the 27th-largest institution in these rankings; People’s United is 42nd.
This is not to say there’s anything wrong with the M&T-People’s United combination. In fact, Herman Chan of Bloomberg Intelligence said the move is “strategically sound” and creates a “northeastern powerhouse” that will allow M&T to leverage some of its investment in technology to reach more customers. Generally, analysts across Wall Street praised the deal for its reasonable price and economies of scale.
M&A in regional banking has been a long time coming. Before the Covid-19 pandemic, BB&T Corp. and SunTrust Banks Inc. combined in the largest bank merger in a decade to create Truist Financial Corp. But it didn’t jump-start an M&A frenzy as expected, in part because the $28 billion deal was so huge — Truist is now the nation’s eighth-largest bank with some $500 billion in assets. Now that the global health crisis hasn’t led to a spike in loan losses, it stands to reason that the pace of acquisitions will pick up in 2021.
Traditionally, the morphing of regional banks into national contenders through acquisitions was easy for anyone to see — just drive past the local branch. Now, brick-and-mortar locations get a company only so far. Ally Bank is entirely online and among the 20 largest commercial banks, according to Fed data. Several other large institutions have no domestic branches, like Barclays Plc’s U.S. subsidiary, which offers online savings accounts and certificates of deposit. Goldman Sachs Group Inc.’s retail bank, Marcus, has a millennial-friendly interface and the full power of Goldman committed to making it a success (even if Omer Ismail, the head of consumer banking, just left for Walmart Inc.’s fintech startup).
The online shift is a powerful structural force that’s hard to overcome. Yes, the recent steepening of the U.S. yield curve is a boon to regional banks that rely primarily on lending margins rather than investment banking and trading revenue. But if the Robinhood saga in financial markets proved anything, it’s that technology and accessibility are disruptive forces. Huntington boasts that it was ranked No. 1 by J.D. Power in customer satisfaction with mobile banking apps among regional banks for two years in a row. M&T has a mobile app, too. That may keep customers from switching over to megabanks or fintech companies for now, but how do they plan to chip away at market share?
Truist, in addition to trimming expenses, may spend $3 billion annually on tech investments, BI’s Chan suggested. That’s still only a fraction of JPMorgan’s outlays, but Kelly King, Truist’s CEO, at least understands the way the industry is moving. Here’s what he said in 2019, soon after debuting a “Disrupt or Die” digital strategy:
Regional bank stocks might have raced to records on pure U.S. growth bets, but from here, further gains look more tied to bets on tech. JPMorgan, Bank of America, Goldman, Truist and even Walmart are jockeying for position, not necessarily in consumers’ neighborhoods or in their wallets, but in their digital lives. An M&A spree will provide regional banks with scale and get them into the tech race, but it won’t change the fact that they’re starting from behind.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Brian Chappatta is a Bloomberg Opinion columnist covering debt markets. He previously covered bonds for Bloomberg News. He is also a CFA charterholder.