Bank Investing

CHAPTER 8M&A

“Banks are sold, not bought.”

– Wall Street saying, provenance unknown

Before we start this chapter, we'd like to remind our readers of the important human aspect of mergers and acquisitions. The exciting cost synergies in an excel model often come at the expense of people's livelihoods, and we should always remain compassionate towards the potential dislocations and disruptions that a merger can bring.

Consolidation has been a meaningful industry trend since the mid-1980s. The number of bank charters has come down from a peak of over 18,000 in the mid-1980s to just over 5,000 (Exhibit 8.1).

Continued consolidation seems like an inevitable trend. To put it bluntly, there are still too many banks and too much legacy banking infrastructure (Exhibits 8.2 and 8.3). An extreme example: The state of Iowa has over 270 commercial and savings banks and a population of just 3.2 million! And from a branch perspective, the United States has approximately 31 bank branches per 100,000 adults, nearly 50% higher than the OECD average.

Other secular trends are at play as well. New paradigms and financial technologies introduce economies of scale opportunities and open new paths for generating positive operating leverage. Regulation and compliance expenses have also created a “sweet spot” for scale that most banks have yet to achieve. The number of banks and branches seems destined to decline, while inversely, the total assets and deposits per bank seem primed to rise.

The astute ...