Does scale matter for regional banks? Is more consolidation necessary?
Those were the questions posed by Mike Mayo, managing director and head of U.S. large-cap bank research at Wells Fargo Securities, during multiple recent earning calls.
One answer was unequivocal:
More than ever, according to Bill Demchak, chairman, president and CEO at PNC Financial Services Group.
According to Demchak, the Goliaths of the industry have been winning on organic deposit share growth, particularly from businesses. “That trend line has accelerated as a function of the mini-crisis in March , where corporations bluntly didn’t trust the regulatory environment to ensure that their deposits at a bank [were] safe. So we’ve seen those deposits flow uphill,” said Demchak. He added that being a large regional benefited PNC, “but just barely.” He thinks smaller institutions may continue to struggle.
As for the future, he thinks PNC needs even greater scale to succeed.
“We need to move into that next level such that we are seen, coast-to-coast, as a ubiquitous brand with the support that the giant banks have in times of crisis. I think it’s critical.”
— Bill Demchak, PNC Financial Group
PNC has achieved some of what it needs via branch growth, but Demchak believes M&A will ultimately be necessary.
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“There are going to be banks that are looking for strong partners and I think we are a strong partner,” said Demchak. “I’m not going to force that issue, but we are a natural player in the consolidation of an industry where scale matters.” He added that he thinks that opportunities will eventually be brought to PNC. “We won’t have to chase them.”
Another analyst, Ebrahim Poonawala, head of North American banks research at Bank of America Securities, prodded Demchak further. He asked if today’s regulatory atmosphere — the Biden administration does not tend to look favorably on bank M&A, due to competitive concerns — would ever permit a pick-up in deal activity, or if a new administration, with a new Department of Justice setting M&A policy, was necessary? (Most notable victim of the Biden policy: Canada’s TD Bank Group struck a deal to acquire First Horizon in late February 2022. After a 14-month wait for regulatory approval that never came, TD cancelled the deal. Dive Deeper: “First Horizon’s CMO Powers Through Merger Misfire with Growth Strategy”)
Demchak said that careful listening to speeches by current officials indicate recognition that there is some need for M&A. “But they’ll also talk about ‘good mergers’ and ‘bad mergers.'”
“I think certain deals will get approved and others won’t,” said Demchak. “We [PNC] have proven as an acquirer that we know what we’re doing, and that the resulting institution is, in fact, stronger than the one we might acquire.”
How Other Regionals Feel about PNC’s Focus on M&A
Questions like this were repeated from one earnings briefing to another as the analyst pack tried to gain a sense of views across the industry. Pursuing the M&A issue teased out a range of attitudes on the need for scale and consolidation.
For the most part, other bankers were putting their chips on growth paths beyond whole-bank purchases. (And none indicated that they would consider selling out to another institution.)
Huntington Bancshares’ chairman, president and CEO Stephen Steinour was asked if whole-bank M&A was essential to his institution’s future. He said Huntington had been pretty successful with its own push to grow organically on multiple fronts, and that the bank is still squeezing more opportunities for growth from its mid-2021 acquisition of TCF Financial Corp.
“We think we have tremendous opportunities in the business lines we already have,” said Steinour. He admitted that Huntington would look at opportunities that pop up, but that he didn’t see that happening in 2024.
Daryl Bible, senior executive vice president and CFO at M&T Bank Corp., said the company has long done acquisitions, but that its priority is to stick to the regions it currently serves and build share in those markets. For example, it continues to invest more in New England and Long Island, N.Y., in the wake of its acquisition of People’s United Financial in early 2022.
“Somebody might want to sell to us at some point,” and M&T might have a look, said Bible. “But we’ve got a lot of work in front of us right now.”
More Ways to Grow than Buying Banks:
Some leaders noted that acquisition isn’t the only way to build scale, and that creating or acquiring specialized operations may be a better strategy in the near term.
For example, Citizens Financial Group launched Citizens Private Bank in late 2023 as part of a continuing effort to build out a specialty in wealth management. Bruce Van Saun, chairman and CEO, said investing in this venture, as well as building on its acquisition of HSBC branches in early 2022, are priorities. The company has also made an acquisition of Clarfeld Financial Advisors in early 2019 and plans to pursue “lift-outs” to bring teams of talent into the private bank throughout 2024. Buy the bankers, rather than the banks.
So, even without whole bank M&A, Van Saun said, “the franchise is in good shape and there’s lots of initiatives that will have us outperform.”
Fifth Third Bancorp’s Timothy Spence, chairman, CEO and president, explained that the company has been aggressively branching in selected markets over the past five years, especially in the Southeast. Over that period the bank has opened 107 branches, he said. In 2023, Fifth Third opened 37 in the Southeast and the company plans to open 32 more in the region in 2024. The company has also acquired treasury management specialist firms and launched an embedded payments business — all expansion without buying other banks.
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Focusing the Spotlight on ‘Targeted Scale’
Wells Fargo’s Mike Mayo asked KeyCorp’s Chris Gorman, chairman and CEO, about the matter: “Chris, one of your competitors’ CEOs said scale has never been more important, and that competitor is larger than you are. How do you think about scale?”
Gorman said that certainly if efforts to make larger institutions carry more capital succeed, and capital grows more expensive, then “that would put more of a premium on scale than before.”
He added that, having said that, scale is not the answer for a bank like Key. For one thing, he said, Key places a much higher emphasis on fee income than other banks its size — gaining 40% of its revenue from fees.
“When you have competitors that are 20 times as big as you are, the question really is, ‘What is scale?'”
— Chris Gorman, KeyCorp
“What we’ve decided to do is focus on ‘targeted scale,’ to be really relevant to the customers we are trying to be relevant to,” Gorman said. Rather than buying other banks, Key has focused on buying niche businesses that add to or complement current strategies — that’s “targeted scale.”
“In terms of looking at other depositories, that’s not something we’re spending any time doing,” said Gorman.