SlideShare una empresa de Scribd logo
1 de 6
Descargar para leer sin conexión
www.strategy-business.com
strategy+business
ONLINE MAY 4, 2016
Come Together
The case for consolidation in U.S. retail and commercial banking.
BY DOUG STOTZ, ARJUN SAXENA, AND SANCHIT TIWARI
www.strategy-business.com
1
depositories as the U.K., Canada, or Australia. Whereas
the top four to six banks in each of those countries ac-
T
he U.S. banking industry has largely sat out the
impressive surge in mergers and acquisitions ac-
tivity of the last few years. Total deal volume hit
a record US$2.3 trillion in 2015 — up 64 percent over
2014. But banks accounted for just 3 percent of the total
value, despite the fact that they account for 9.3 percent
of total market capitalization. That’s about to change:
We believe the pace of M&A in U.S. banking will ac-
celerate sharply in 2016.
The market structure of U.S. banking is obsolete,
and the industry’s profitability has been weak for nearly
a decade. Regulatory and competitive pressures are
making it hard for most banks to grow revenues and
profits. The convergence of these trends makes it im-
perative that banks consolidate to gain scale and lower
their cost structures. As a result, we expect to see
significant consolidation among mid-tier players —
those banks with between $10 billion and $250 billion
in assets.
Despite the failures of several large banks and hun-
dreds of mergers in the past decade, the U.S. banking
market remains significantly more fragmented than the
markets of other large developed nations. State and fed-
eral regulations — particularly a ban on interstate bank-
ing — that remained in place until the 1980s discour-
aged concentration in the banking sector. Although
these restrictions have largely been repealed, the U.S.
still has more than 15 times the number of regulated
Come Together
The case for consolidation in U.S. retail and commercial banking.
by Doug Stotz, Arjun Saxena, and Sanchit Tiwari
Exhibit 1: Top 20 Bank Market Shares by
Consumer Banking Category
The three largest banks have garnered the lion's share of growth in
deposits and debit cards in recent years.
Top 3 (Wells, BoA, JPM)
Banks 4 to 20
Branches
as of
March 2015
18.0%
82.0%
share
Deposits
as of
March 2015
32.7%
67.3%
Deposit
Growth
2011–14
66.2%
34.8%
Net Debit
Card Growth
2011–14
96.7%
3.2%
Note: Debit card growth used as proxy for checking account growth. Totals may not
equal 100 due to rounding.
Source: FDIC Summary Data (Mar. 31, 2015), Nilson Report (Apr. 2015)
www.strategy-business.com
2
The Revenue and Profit Squeeze
The primary driver for M&A activity is the difficulty
that banks face in raising profits. Almost all U.S. banks
are facing significant profitability problems. Returns on
equity for 74 percent of banks with $10 billion to $150
billion in assets were below their long-term cost of capi-
tal (approximately 10 percent) in 2014.
As a result, price-to-book-value ratios are low by
historical standards. And that makes the U.S. banking
sector an attractive hunting ground for potential foreign
acquirers and for activist investors.
With activism rising across the industry, targets are
no longer limited to small players, as shown by recent
campaigns against larger specialized and regional banks.
count for 90 percent or more of total deposits, even the
20 largest banks in the U.S. control only 59 percent of
total deposits.
Despite the fragmentation of the U.S. banking sys-
tem, the very largest banks are capturing the lion’s share
of growth in key lines of business. Between 2011 and
2014, the three biggest U.S. banks — Bank of America,
JPMorgan Chase, and Wells Fargo — accounted for
nearly two-thirds of deposit growth and virtually all the
net growth in debit cards, which is a good proxy for
consumer checking accounts (see Exhibit 1).
Given their scale, these players can significantly
out-invest other banks in brand marketing, data analyt-
ics, and digital products and services.
Doug Stotz
doug.stotz@
strategyand.us.pwc.com
is an advisor to senior execu-
tives in the financial-services
industry for Strategy&, PwC’s
strategy consulting group. He
is a principal with PwC US
based in New York.
Arjun Saxena
arjun.saxena@
strategyand.us.pwc.com
is an advisor to executives in
the financial-services sector
for Strategy&. He is a principal
with PwC US based in New
York. His focus is organic and
M&A growth strategies.
Sanchit Tiwari
sanchit.tiwari@
strategyand.us.pwc.com
focuses on growth strategies
and banking and payments
with financial-services clients
for Strategy&. He is a director
with PwC US based in New
York.
IllustrationbyMartinLeonBarreto
www.strategy-business.com
3
consolidation can yield significant cost benefits. For a
typical regional bank with retail and commercial busi-
nesses, 30 percent of total costs are variable by volume,
35 percent are driven by the branch network, and an-
other 35 percent are “scalable” costs driven by organiza-
tional complexity.
Consolidation can help control costs by shedding
excess branch capacity, as well as by spreading fixed
regulatory, legal, compliance, and other organizational
costs over a larger base. KeyCorp’s proposed $4.1 billion
acquisition of First Niagara Financial Group, an-
nounced in 2014, is an example. KeyCorp plans to drive
significant cost savings via an 11 percent consolidation
of branches. Then it intends to reinvest part of the cost
savings into online and mobile solutions and digital
channels — where transactions are growing significant-
ly faster than branch transactions — as well as in strate-
gic partnerships to improve automation, regulatory
compliance, and customer experience.
For some smaller to midsized banks, building scale
via M&A is crucial. Under legislation enacted in 2010,
regulatory cost and complexity rise sharply for banks
when total assets hit thresholds of $10 billion and $50
billion.
For banks nearing these levels, acquiring or merg-
The activists include Trian Partners (which has targeted
BNY Mellon and State Street), Greenlight Capital (Cit-
izens Financial, CIT Group), Basswood Capital Man-
agement (Hudson Valley Bank, Synovus, Astoria Finan-
cial), and Hudson Executive Capital (Comerica, CIT
Group). This activity will likely increase. PL Capital has
announced a new private equity fund focusing on banks
with between $3 billion and $75 billion in assets.
It is clear that banks will have difficulty boosting
profits on their own. Merely to raise the return on eq-
uity in the sector to equal their 10 percent long-term
cost of capital, banks would need to increase cumulative
pretax profits by 35 percent — a total of $38 billion per
year. This increase would need to come from a combi-
nation of cost reengineering and revenue growth.
Improving the bottom line is likely to be difficult
because the top line isn’t growing much. Overall reve-
nues have been under pressure since their 2007 peak at
the crest of the previous business cycle. Net interest in-
come has been flat in the post-2007 era, thanks to the
low interest rate environment and flat yield curve. Digi-
tization and new regulations have also driven down vol-
umes and margins across capital-markets and sales and
trading businesses.
Noninterest income has also been flat, due to a se-
ries of postcrisis legislative initiatives that adversely im-
pacted fee-based revenue in deposit taking, credit cards,
and payments. Ongoing scrutiny from the newly creat-
ed Consumer Financial Protection Bureau has driven
down pricing and ancillary revenues in consumer-facing
businesses like mortgages, deposit banking, credit cards,
student lending, auto lending, and unsecured lending
(see Exhibit 2).
Banks have also ceded market share to nonbank
players in businesses such as subprime lending, asset
management, proprietary trading, and wealth manage-
ment. In particular, nimbler, nonregulated financial
technology players like LendingTree, Lending Club,
and PayPal are intruding into the more lucrative, fee-
based businesses of banks such as retail lending and
global payments. Technology has lowered barriers to
entry for these new competitors, with big data analytics
and digital channels lowering costs of identifying and
marketing to “cherry-picked” prospects.
How Consolidation Can Help
Given the anemic outlook for GDP and income growth,
it will be difficult for the U.S. banking industry as a
whole to show impressive top-line growth. However,
Exhibit 2: Keeping Up
Over the past several years, growth in banks’ income has kept pace with
overall economic growth.
2000
2005
2010
2014
$0
$700
$800
$600
$500
$400
$300
$200
$100
0
20
40
60
80
100
120
140
Income
(US$ Billions)
GDP
Index
(2007)
Net Interest Income
Total Income
Nominal GDP
Non-Interest Income
2000–07 2007–15
5.5% 2.0%
5.1% 2.6%
5.0% 0.9%
5.9% 2.8%
CAGR:
Note: 2009–14 data affected by institutions that converted to bank holding companies
during financial crisis (e.g., AXP, CIT, DFS GS, MS).
Source: FDIC HSOB, Federal Reserve of St. Louis, Strategy& analysis
www.strategy-business.com
4
than 10 percent of total U.S. deposits, would prevent
any acquisitions of major depositories by JPMorgan
Chase, Wells Fargo, or Bank of America. Several of the
nation’s largest institutions are seeking to reduce their
scale and complexity as a result of regulatory con-
straints. So, too, are systemically important nonbank
institutions such as GE Capital and MetLife. As a
result, these larger institutions are exploring divestitures
and spin-offs.
For all these reasons, we believe that the needed
consolidation will be concentrated among mid-tier
banks. Based on our analysis, $600 billion worth of
M&A would be needed to provide enough cost savings
to boost the return on average equity of the sector by
2 percentage points — thus allowing it to earn its cost
of capital.
Over the next year or more, U.S. bank CEOs,
CFOs, and boards of directors should give serious con-
sideration to M&A as a strategic lever. They need to
analyze and develop a view on whether they could drive
cost efficiencies and revenue synergies as an acquirer, or
potential shareholder returns as a target. They should
articulate a deal thesis as part of their three- to five-year
strategy, and consider whether there are unique capa-
bilities that they would seek to obtain from, or contrib-
ute to, a prospective deal. And they should conduct
preliminary reviews of potential targets’ balance sheets,
as well as their capabilities and customer profiles.
Finally, they should also explore potential opportunities
to accelerate growth of digital capabilities through
investments in, or acquisitions of, financial technology
players.
A merger won’t always be a sufficient tactic for mid-
sized banks to gain the scale and operating efficiencies
needed to compete in today’s environment. But given
the field in which they now compete, it may be a neces-
sary one. +
ing with another bank can effectively lower these costs
by spreading them over a larger base. For example, New
York Community Bancorp ($50.3 billion in assets)
agreed to purchase Astoria Financial Corp. ($16.5 bil-
lion in assets) in a $2 billion transaction announced in
2015. The combined company will have assets of some
$64 billion, moving decisively past the $50 billion
threshold.
Deals to expand into adjacent products or markets
or to add capabilities may also make strategic sense. Ex-
amples include RBC’s recent acquisition of City Na-
tional to add private banking and business banking to
its U.S. retail brokerage and capital markets franchise;
Capital One’s expansion into healthcare lending
through the acquisition of GE Capital’s healthcare lend-
ing business; and Barclays’ acquisition of Logic Group
to enhance payment and loyalty technology capabilities.
Vertical integration, such as CIT Group’s 2015 ac-
quisition of OneWest Bank, is another option. The $3.4
billion deal enabled CIT to add a branch banking fran-
chise to its commercial lending and leasing platform,
creating greater liquidity and growing net interest mar-
gin through replacing wholesale funding with cheaper
retail deposits.
.
Shoring Up the Banking Sector
It is clear that a healthy U.S. banking sector that earns
its cost of capital, and that can continue to support
the credit, payments, and risk management needs of an
expanding economy, would be in the interests of cus-
tomers, bank shareholders, regulators, and other indus-
try stakeholders. The developments and trends we have
outlined, however, demonstrate that significant consoli-
dation is needed to enhance profitability and enable
more banks to invest in growing markets and key strat-
egic capabilities such as digitization, analytics, and
brands.
The challenge is that regulators are averse to the
largest banking institutions (those deemed to be “sys-
temically important”) getting any bigger. As a result,
they have argued against further consolidation among
top-tier banks. In any event, the national deposit cap,
which prevents any single bank from amassing more
strategy+business magazine
is published by certain member firms
of the PwC network.
To subscribe, visit strategy-business.com
or call 1-855-869-4862.
• strategy-business.com
• facebook.com/strategybusiness
• linkedin.com/company/strategy-business
• twitter.com/stratandbiz
Articles published in strategy+business do not necessarily represent the views of the member firms of the
PwC network. Reviews and mentions of publications, products, or services do not constitute endorsement
or recommendation for purchase.
© 2016 PwC. All rights reserved. PwC refers to the PwC network and/or one or more of its member firms,
each of which is a separate legal entity. Please see www.pwc.com/structure for further details. Mentions
of Strategy& refer to the global team of practical strategists that is integrated within the PwC network of
firms. For more about Strategy&, see www.strategyand.pwc.com. No reproduction is permitted in whole or
part without written permission of PwC. “strategy+business” is a trademark of PwC.

Más contenido relacionado

La actualidad más candente

CIT Commercial Real Estate Outlook
CIT Commercial Real Estate OutlookCIT Commercial Real Estate Outlook
CIT Commercial Real Estate OutlookCIT Group
 
Sustainability: changing the debate in emerging markets (IBR 2014)
Sustainability: changing the debate in emerging markets (IBR 2014)Sustainability: changing the debate in emerging markets (IBR 2014)
Sustainability: changing the debate in emerging markets (IBR 2014)Grant Thornton International Ltd
 
Our global capabilities: financial services
Our global capabilities: financial servicesOur global capabilities: financial services
Our global capabilities: financial servicesGrant Thornton
 
Layups vs layoffs: Why Employment is Stuck In Low Gear
Layups vs layoffs: Why Employment is Stuck In Low GearLayups vs layoffs: Why Employment is Stuck In Low Gear
Layups vs layoffs: Why Employment is Stuck In Low GearGene Balas, CFA
 
Report on Staple's
Report on Staple'sReport on Staple's
Report on Staple'sJiaying Zhu
 
Aligning operating models and strategic priorities
Aligning operating models and strategic prioritiesAligning operating models and strategic priorities
Aligning operating models and strategic prioritiesEY
 
2016 Australia - State of the Legal Market FINAL.PDF
2016 Australia - State of the Legal Market FINAL.PDF2016 Australia - State of the Legal Market FINAL.PDF
2016 Australia - State of the Legal Market FINAL.PDFBarolsky Advisors Pty Ltd
 
DealMarket DIGEST Issue 175 // 06 March 2015
DealMarket DIGEST Issue 175 // 06 March 2015DealMarket DIGEST Issue 175 // 06 March 2015
DealMarket DIGEST Issue 175 // 06 March 2015CAR FOR YOU
 
EY Global Insurance CFO Survey
EY Global Insurance CFO SurveyEY Global Insurance CFO Survey
EY Global Insurance CFO SurveyEY
 
Food and beverage looks to the future
Food and beverage looks to the futureFood and beverage looks to the future
Food and beverage looks to the futureGrant Thornton
 
201405 EY Capital-Confidence-Barometer-april-2014
201405 EY Capital-Confidence-Barometer-april-2014201405 EY Capital-Confidence-Barometer-april-2014
201405 EY Capital-Confidence-Barometer-april-2014Francisco Calzado
 
The Irrepressible Entrepreneur
The Irrepressible EntrepreneurThe Irrepressible Entrepreneur
The Irrepressible EntrepreneurRegus
 
Rules of Thumb for a Volatile Market
Rules of Thumb for a Volatile MarketRules of Thumb for a Volatile Market
Rules of Thumb for a Volatile MarketMarqus J Freeman
 
The 2013 Honomichl TOP 50 report
The 2013 Honomichl TOP 50 reportThe 2013 Honomichl TOP 50 report
The 2013 Honomichl TOP 50 reportKaty Borges
 
IPO WATCH REPORT 2017 - FINAL
IPO WATCH REPORT 2017 - FINALIPO WATCH REPORT 2017 - FINAL
IPO WATCH REPORT 2017 - FINALMarcus Ohm
 
SVB State of the Markets: Second Quarter 2017
SVB State of the Markets: Second Quarter 2017SVB State of the Markets: Second Quarter 2017
SVB State of the Markets: Second Quarter 2017Silicon Valley Bank
 

La actualidad más candente (20)

CIT Commercial Real Estate Outlook
CIT Commercial Real Estate OutlookCIT Commercial Real Estate Outlook
CIT Commercial Real Estate Outlook
 
Sustainability: changing the debate in emerging markets (IBR 2014)
Sustainability: changing the debate in emerging markets (IBR 2014)Sustainability: changing the debate in emerging markets (IBR 2014)
Sustainability: changing the debate in emerging markets (IBR 2014)
 
Our global capabilities: financial services
Our global capabilities: financial servicesOur global capabilities: financial services
Our global capabilities: financial services
 
Layups vs layoffs: Why Employment is Stuck In Low Gear
Layups vs layoffs: Why Employment is Stuck In Low GearLayups vs layoffs: Why Employment is Stuck In Low Gear
Layups vs layoffs: Why Employment is Stuck In Low Gear
 
Report on Staple's
Report on Staple'sReport on Staple's
Report on Staple's
 
Aligning operating models and strategic priorities
Aligning operating models and strategic prioritiesAligning operating models and strategic priorities
Aligning operating models and strategic priorities
 
2016 Australia - State of the Legal Market FINAL.PDF
2016 Australia - State of the Legal Market FINAL.PDF2016 Australia - State of the Legal Market FINAL.PDF
2016 Australia - State of the Legal Market FINAL.PDF
 
DealMarket DIGEST Issue 175 // 06 March 2015
DealMarket DIGEST Issue 175 // 06 March 2015DealMarket DIGEST Issue 175 // 06 March 2015
DealMarket DIGEST Issue 175 // 06 March 2015
 
EY Global Insurance CFO Survey
EY Global Insurance CFO SurveyEY Global Insurance CFO Survey
EY Global Insurance CFO Survey
 
Food and beverage looks to the future
Food and beverage looks to the futureFood and beverage looks to the future
Food and beverage looks to the future
 
201405 EY Capital-Confidence-Barometer-april-2014
201405 EY Capital-Confidence-Barometer-april-2014201405 EY Capital-Confidence-Barometer-april-2014
201405 EY Capital-Confidence-Barometer-april-2014
 
The Irrepressible Entrepreneur
The Irrepressible EntrepreneurThe Irrepressible Entrepreneur
The Irrepressible Entrepreneur
 
Uk 2018 report
Uk 2018 reportUk 2018 report
Uk 2018 report
 
Rules of Thumb for a Volatile Market
Rules of Thumb for a Volatile MarketRules of Thumb for a Volatile Market
Rules of Thumb for a Volatile Market
 
2017 State of the Venture Capital Industry
2017 State of the Venture Capital Industry2017 State of the Venture Capital Industry
2017 State of the Venture Capital Industry
 
Small Business Whitepaper - FINAL
Small Business Whitepaper - FINALSmall Business Whitepaper - FINAL
Small Business Whitepaper - FINAL
 
The 2013 Honomichl TOP 50 report
The 2013 Honomichl TOP 50 reportThe 2013 Honomichl TOP 50 report
The 2013 Honomichl TOP 50 report
 
IPO WATCH REPORT 2017 - FINAL
IPO WATCH REPORT 2017 - FINALIPO WATCH REPORT 2017 - FINAL
IPO WATCH REPORT 2017 - FINAL
 
SVB State of the Markets: Second Quarter 2017
SVB State of the Markets: Second Quarter 2017SVB State of the Markets: Second Quarter 2017
SVB State of the Markets: Second Quarter 2017
 
Rise of Private Markets 2018
Rise of Private Markets 2018Rise of Private Markets 2018
Rise of Private Markets 2018
 

Destacado

Destacado (20)

The Dangers of Adjacencies Strategy
The Dangers of Adjacencies StrategyThe Dangers of Adjacencies Strategy
The Dangers of Adjacencies Strategy
 
Organizing for Advantage
Organizing for AdvantageOrganizing for Advantage
Organizing for Advantage
 
The New Supercompetitors
The New SupercompetitorsThe New Supercompetitors
The New Supercompetitors
 
Three Secrets of Organizational Effectiveness
Three Secrets of Organizational EffectivenessThree Secrets of Organizational Effectiveness
Three Secrets of Organizational Effectiveness
 
Diagnosing Dislocation
Diagnosing DislocationDiagnosing Dislocation
Diagnosing Dislocation
 
How to Lead in Ambiguous Times
How to Lead in Ambiguous TimesHow to Lead in Ambiguous Times
How to Lead in Ambiguous Times
 
Secrets of the Activist Manager
Secrets of the Activist ManagerSecrets of the Activist Manager
Secrets of the Activist Manager
 
The Frugal Way to Grow
The Frugal Way to GrowThe Frugal Way to Grow
The Frugal Way to Grow
 
Does Your Company Keep Its Promises
Does Your Company Keep Its PromisesDoes Your Company Keep Its Promises
Does Your Company Keep Its Promises
 
How to Design a Winning Company
How to Design a Winning CompanyHow to Design a Winning Company
How to Design a Winning Company
 
It's Time for a Change
It's Time for a ChangeIt's Time for a Change
It's Time for a Change
 
A Strategist's Guide to the Internet of Things
A Strategist's Guide to the Internet of ThingsA Strategist's Guide to the Internet of Things
A Strategist's Guide to the Internet of Things
 
Think Functionally, Act Strategically
Think Functionally, Act StrategicallyThink Functionally, Act Strategically
Think Functionally, Act Strategically
 
10 Principles of Strategy through Execution
10 Principles of Strategy through Execution10 Principles of Strategy through Execution
10 Principles of Strategy through Execution
 
20/20 Foresight
20/20 Foresight20/20 Foresight
20/20 Foresight
 
Is strategy-fixed-or-variable
Is strategy-fixed-or-variableIs strategy-fixed-or-variable
Is strategy-fixed-or-variable
 
Consistency Drives Success at Telus
Consistency Drives Success at TelusConsistency Drives Success at Telus
Consistency Drives Success at Telus
 
Life in the Matrix
Life in the MatrixLife in the Matrix
Life in the Matrix
 
Creating a Strategy That Works
Creating a Strategy That WorksCreating a Strategy That Works
Creating a Strategy That Works
 
Scale Your Innovation Initiatives
Scale Your Innovation InitiativesScale Your Innovation Initiatives
Scale Your Innovation Initiatives
 

Similar a Come Together

2015 banking outlook: The future is bright, but change your password
2015 banking outlook: The future is bright, but change your password 2015 banking outlook: The future is bright, but change your password
2015 banking outlook: The future is bright, but change your password Grant Thornton LLP
 
201501 The Emerging Equilibrium in Banking
201501 The Emerging Equilibrium in Banking201501 The Emerging Equilibrium in Banking
201501 The Emerging Equilibrium in BankingFrancisco Calzado
 
Retail Banking Growth Challenges and Creative Solutions
Retail Banking Growth Challenges and Creative SolutionsRetail Banking Growth Challenges and Creative Solutions
Retail Banking Growth Challenges and Creative SolutionsBoston Consulting Group
 
Michael Durante Western Reserve Blackwall Partners 2011 outlook primer- final
Michael Durante Western Reserve Blackwall Partners   2011 outlook primer- finalMichael Durante Western Reserve Blackwall Partners   2011 outlook primer- final
Michael Durante Western Reserve Blackwall Partners 2011 outlook primer- finalMichael Durante
 
Bank innovation - PwC Study on When the Growing Gets Tough: How Retail Banks ...
Bank innovation - PwC Study on When the Growing Gets Tough: How Retail Banks ...Bank innovation - PwC Study on When the Growing Gets Tough: How Retail Banks ...
Bank innovation - PwC Study on When the Growing Gets Tough: How Retail Banks ...Jeff Grill
 
Etude PwC sur les opérations de fusions et acquisitions dans le secteur banca...
Etude PwC sur les opérations de fusions et acquisitions dans le secteur banca...Etude PwC sur les opérations de fusions et acquisitions dans le secteur banca...
Etude PwC sur les opérations de fusions et acquisitions dans le secteur banca...PwC France
 
Underbanked and Unbanked Consumers in the U.S.: Successfully Targeting Consum...
Underbanked and Unbanked Consumers in the U.S.: Successfully Targeting Consum...Underbanked and Unbanked Consumers in the U.S.: Successfully Targeting Consum...
Underbanked and Unbanked Consumers in the U.S.: Successfully Targeting Consum...MarketResearch.com
 
Us Banking Industry PowerPoint Presentation Slides
Us Banking Industry PowerPoint Presentation Slides Us Banking Industry PowerPoint Presentation Slides
Us Banking Industry PowerPoint Presentation Slides SlideTeam
 
Banking PowerPoint Presentation Slides
Banking PowerPoint Presentation Slides Banking PowerPoint Presentation Slides
Banking PowerPoint Presentation Slides SlideTeam
 
Ft partners research the rise of challenger banks
Ft partners research   the rise of challenger banksFt partners research   the rise of challenger banks
Ft partners research the rise of challenger banksChris Skinner
 
Michael Durante Western Reserve Blackwall Partners Camel Race
Michael Durante Western Reserve Blackwall Partners Camel RaceMichael Durante Western Reserve Blackwall Partners Camel Race
Michael Durante Western Reserve Blackwall Partners Camel RaceMichael Durante
 
Michael Durante Western Reserve March 2011- Camel Race
Michael Durante Western Reserve March 2011- Camel RaceMichael Durante Western Reserve March 2011- Camel Race
Michael Durante Western Reserve March 2011- Camel RaceMichael Durante
 
Banking Powerpoint Presentation Slides
Banking Powerpoint Presentation SlidesBanking Powerpoint Presentation Slides
Banking Powerpoint Presentation SlidesSlideTeam
 
Industry and firm profile- MBA course paper
Industry and firm profile- MBA course paperIndustry and firm profile- MBA course paper
Industry and firm profile- MBA course papergirish0984
 
Exequor White Paper - Stressing Over Stress Testing
Exequor White Paper - Stressing Over Stress TestingExequor White Paper - Stressing Over Stress Testing
Exequor White Paper - Stressing Over Stress TestingDavid Green, Ph.D., CFA
 
Community Bank Overview PowerPoint Presentation Slides
Community Bank Overview PowerPoint Presentation SlidesCommunity Bank Overview PowerPoint Presentation Slides
Community Bank Overview PowerPoint Presentation SlidesSlideTeam
 
Su10 ceo workshop_supporting slides
Su10 ceo workshop_supporting slidesSu10 ceo workshop_supporting slides
Su10 ceo workshop_supporting slidesmcgowaUSA
 
Mercer Capital's Bank Watch | October 2020 | Low Rates and Tighter NIMs Spur ...
Mercer Capital's Bank Watch | October 2020 | Low Rates and Tighter NIMs Spur ...Mercer Capital's Bank Watch | October 2020 | Low Rates and Tighter NIMs Spur ...
Mercer Capital's Bank Watch | October 2020 | Low Rates and Tighter NIMs Spur ...Mercer Capital
 

Similar a Come Together (20)

Why the Banking Industry Needs $600 Billion Worth of M&A
Why the Banking Industry Needs $600 Billion Worth of M&AWhy the Banking Industry Needs $600 Billion Worth of M&A
Why the Banking Industry Needs $600 Billion Worth of M&A
 
2015 banking outlook: The future is bright, but change your password
2015 banking outlook: The future is bright, but change your password 2015 banking outlook: The future is bright, but change your password
2015 banking outlook: The future is bright, but change your password
 
201501 The Emerging Equilibrium in Banking
201501 The Emerging Equilibrium in Banking201501 The Emerging Equilibrium in Banking
201501 The Emerging Equilibrium in Banking
 
Global Operations of Bank of America, March 2011
Global Operations of Bank of America, March 2011Global Operations of Bank of America, March 2011
Global Operations of Bank of America, March 2011
 
Retail Banking Growth Challenges and Creative Solutions
Retail Banking Growth Challenges and Creative SolutionsRetail Banking Growth Challenges and Creative Solutions
Retail Banking Growth Challenges and Creative Solutions
 
Michael Durante Western Reserve Blackwall Partners 2011 outlook primer- final
Michael Durante Western Reserve Blackwall Partners   2011 outlook primer- finalMichael Durante Western Reserve Blackwall Partners   2011 outlook primer- final
Michael Durante Western Reserve Blackwall Partners 2011 outlook primer- final
 
Bank innovation - PwC Study on When the Growing Gets Tough: How Retail Banks ...
Bank innovation - PwC Study on When the Growing Gets Tough: How Retail Banks ...Bank innovation - PwC Study on When the Growing Gets Tough: How Retail Banks ...
Bank innovation - PwC Study on When the Growing Gets Tough: How Retail Banks ...
 
Etude PwC sur les opérations de fusions et acquisitions dans le secteur banca...
Etude PwC sur les opérations de fusions et acquisitions dans le secteur banca...Etude PwC sur les opérations de fusions et acquisitions dans le secteur banca...
Etude PwC sur les opérations de fusions et acquisitions dans le secteur banca...
 
Underbanked and Unbanked Consumers in the U.S.: Successfully Targeting Consum...
Underbanked and Unbanked Consumers in the U.S.: Successfully Targeting Consum...Underbanked and Unbanked Consumers in the U.S.: Successfully Targeting Consum...
Underbanked and Unbanked Consumers in the U.S.: Successfully Targeting Consum...
 
Us Banking Industry PowerPoint Presentation Slides
Us Banking Industry PowerPoint Presentation Slides Us Banking Industry PowerPoint Presentation Slides
Us Banking Industry PowerPoint Presentation Slides
 
Banking PowerPoint Presentation Slides
Banking PowerPoint Presentation Slides Banking PowerPoint Presentation Slides
Banking PowerPoint Presentation Slides
 
Ft partners research the rise of challenger banks
Ft partners research   the rise of challenger banksFt partners research   the rise of challenger banks
Ft partners research the rise of challenger banks
 
Michael Durante Western Reserve Blackwall Partners Camel Race
Michael Durante Western Reserve Blackwall Partners Camel RaceMichael Durante Western Reserve Blackwall Partners Camel Race
Michael Durante Western Reserve Blackwall Partners Camel Race
 
Michael Durante Western Reserve March 2011- Camel Race
Michael Durante Western Reserve March 2011- Camel RaceMichael Durante Western Reserve March 2011- Camel Race
Michael Durante Western Reserve March 2011- Camel Race
 
Banking Powerpoint Presentation Slides
Banking Powerpoint Presentation SlidesBanking Powerpoint Presentation Slides
Banking Powerpoint Presentation Slides
 
Industry and firm profile- MBA course paper
Industry and firm profile- MBA course paperIndustry and firm profile- MBA course paper
Industry and firm profile- MBA course paper
 
Exequor White Paper - Stressing Over Stress Testing
Exequor White Paper - Stressing Over Stress TestingExequor White Paper - Stressing Over Stress Testing
Exequor White Paper - Stressing Over Stress Testing
 
Community Bank Overview PowerPoint Presentation Slides
Community Bank Overview PowerPoint Presentation SlidesCommunity Bank Overview PowerPoint Presentation Slides
Community Bank Overview PowerPoint Presentation Slides
 
Su10 ceo workshop_supporting slides
Su10 ceo workshop_supporting slidesSu10 ceo workshop_supporting slides
Su10 ceo workshop_supporting slides
 
Mercer Capital's Bank Watch | October 2020 | Low Rates and Tighter NIMs Spur ...
Mercer Capital's Bank Watch | October 2020 | Low Rates and Tighter NIMs Spur ...Mercer Capital's Bank Watch | October 2020 | Low Rates and Tighter NIMs Spur ...
Mercer Capital's Bank Watch | October 2020 | Low Rates and Tighter NIMs Spur ...
 

Más de Strategy&, a member of the PwC network

Más de Strategy&, a member of the PwC network (20)

The seven stages of strategic leadership
The seven stages of strategic leadershipThe seven stages of strategic leadership
The seven stages of strategic leadership
 
Organizational effectiveness goes digital
Organizational effectiveness goes digital  Organizational effectiveness goes digital
Organizational effectiveness goes digital
 
Winning with a data-driven strategy
Winning with a data-driven strategyWinning with a data-driven strategy
Winning with a data-driven strategy
 
Automating trust with new technologies
Automating trust with new technologiesAutomating trust with new technologies
Automating trust with new technologies
 
Facing up to the automotive innovation dilemma
Facing up to  the automotive  innovation dilemmaFacing up to  the automotive  innovation dilemma
Facing up to the automotive innovation dilemma
 
The Four X Factors of Exceptional Leaders
The Four X Factors of Exceptional LeadersThe Four X Factors of Exceptional Leaders
The Four X Factors of Exceptional Leaders
 
What is fair when it comes to AI bias?
What is fair when it comes to AI bias?What is fair when it comes to AI bias?
What is fair when it comes to AI bias?
 
Chinese cars go global
Chinese cars go globalChinese cars go global
Chinese cars go global
 
Power strategies
Power strategiesPower strategies
Power strategies
 
Tomorrow's Data Heros
Tomorrow's Data HerosTomorrow's Data Heros
Tomorrow's Data Heros
 
Is AI the Next Frontier for National Competitive Advantage?
Is AI the Next Frontier for National Competitive Advantage?Is AI the Next Frontier for National Competitive Advantage?
Is AI the Next Frontier for National Competitive Advantage?
 
Memo to the CEO: Is Your Chief Strategy Officer Set Up for Success?
Memo to the CEO: Is Your Chief Strategy Officer Set Up for Success?Memo to the CEO: Is Your Chief Strategy Officer Set Up for Success?
Memo to the CEO: Is Your Chief Strategy Officer Set Up for Success?
 
Memo to the CEO: Is Your Chief Strategy Officer Set Up for Success?
Memo to the CEO: Is Your Chief Strategy Officer Set Up for Success?Memo to the CEO: Is Your Chief Strategy Officer Set Up for Success?
Memo to the CEO: Is Your Chief Strategy Officer Set Up for Success?
 
HQ 2.0: The Next-Generation Corporate Center
HQ 2.0: The Next-Generation Corporate CenterHQ 2.0: The Next-Generation Corporate Center
HQ 2.0: The Next-Generation Corporate Center
 
Keeping Cool under Pressure
Keeping Cool under PressureKeeping Cool under Pressure
Keeping Cool under Pressure
 
The Flywheel Philosophy
The Flywheel PhilosophyThe Flywheel Philosophy
The Flywheel Philosophy
 
Leading a Bionic Transformation
Leading a Bionic TransformationLeading a Bionic Transformation
Leading a Bionic Transformation
 
Why Is It So Hard to Trust a Blockchain?
Why Is It So Hard to Trust a Blockchain?Why Is It So Hard to Trust a Blockchain?
Why Is It So Hard to Trust a Blockchain?
 
The Future of Artificial Intelligence Depends on Trust
The Future of Artificial Intelligence Depends on TrustThe Future of Artificial Intelligence Depends on Trust
The Future of Artificial Intelligence Depends on Trust
 
Approaching Diversity with the Brain in Mind
Approaching Diversity with the Brain in MindApproaching Diversity with the Brain in Mind
Approaching Diversity with the Brain in Mind
 

Último

The Smart Bridge Interview now Veranda Learning
The Smart Bridge Interview now Veranda LearningThe Smart Bridge Interview now Veranda Learning
The Smart Bridge Interview now Veranda LearningNaval Singh
 
A Case Study On SQUARE GROUP Bangladesh.pdf
A Case Study On SQUARE GROUP Bangladesh.pdfA Case Study On SQUARE GROUP Bangladesh.pdf
A Case Study On SQUARE GROUP Bangladesh.pdfmeftaul987
 
Importance of Commercial Vehicle Insurance.pptx
Importance of Commercial Vehicle Insurance.pptxImportance of Commercial Vehicle Insurance.pptx
Importance of Commercial Vehicle Insurance.pptxBonano Insurance
 
NewBase 14 March 2024 Energy News issue - 1707 by Khaled Al Awadi_compress...
NewBase  14 March  2024  Energy News issue - 1707 by Khaled Al Awadi_compress...NewBase  14 March  2024  Energy News issue - 1707 by Khaled Al Awadi_compress...
NewBase 14 March 2024 Energy News issue - 1707 by Khaled Al Awadi_compress...Khaled Al Awadi
 
We are inviting you on board, to move forward together in the Right Direction
We are inviting you on board, to move forward together in the Right DirectionWe are inviting you on board, to move forward together in the Right Direction
We are inviting you on board, to move forward together in the Right DirectionRight Direction Aero
 
CORPORATE SOCIAL RESPONSIBILITY - FINAL REQUIREMENT.pdf
CORPORATE SOCIAL RESPONSIBILITY - FINAL REQUIREMENT.pdfCORPORATE SOCIAL RESPONSIBILITY - FINAL REQUIREMENT.pdf
CORPORATE SOCIAL RESPONSIBILITY - FINAL REQUIREMENT.pdfLouis Malaybalay
 
Benihana of Tokyo case study11111111.pdf
Benihana of Tokyo case study11111111.pdfBenihana of Tokyo case study11111111.pdf
Benihana of Tokyo case study11111111.pdfjavenxxx01
 
Shopclues: Failure & Solutions in Business Model
Shopclues: Failure & Solutions in Business ModelShopclues: Failure & Solutions in Business Model
Shopclues: Failure & Solutions in Business ModelBhaviniSharma12
 
L-1 VISA Business (Plan Sample) - Plan Writers
L-1 VISA Business (Plan Sample) - Plan WritersL-1 VISA Business (Plan Sample) - Plan Writers
L-1 VISA Business (Plan Sample) - Plan WritersPlan Writers
 
Wallet Pitch for startup fintech and loan
Wallet Pitch for startup fintech and loanWallet Pitch for startup fintech and loan
Wallet Pitch for startup fintech and loansujat8807
 
How The Hustle Milestone Referral Program Got 300K Subscribers
How The Hustle Milestone Referral Program Got 300K SubscribersHow The Hustle Milestone Referral Program Got 300K Subscribers
How The Hustle Milestone Referral Program Got 300K SubscribersFlyyx Tech
 
The Vietnam Believer_Newsletter_Vol.001_Mar12 2024
The Vietnam Believer_Newsletter_Vol.001_Mar12 2024The Vietnam Believer_Newsletter_Vol.001_Mar12 2024
The Vietnam Believer_Newsletter_Vol.001_Mar12 2024believeminhh
 
PHX Corporate Presentation March 2024 Final
PHX Corporate Presentation March 2024 FinalPHX Corporate Presentation March 2024 Final
PHX Corporate Presentation March 2024 FinalPanhandleOilandGas
 
unfinished legacy it is a clothing brand
unfinished legacy it is a clothing brandunfinished legacy it is a clothing brand
unfinished legacy it is a clothing brandakashm530190
 
AirOxi - Pioneering Aquaculture Advancements Through NFDB Empanelment.pptx
AirOxi -  Pioneering Aquaculture Advancements Through NFDB Empanelment.pptxAirOxi -  Pioneering Aquaculture Advancements Through NFDB Empanelment.pptx
AirOxi - Pioneering Aquaculture Advancements Through NFDB Empanelment.pptxAirOxi Tube
 
Olympus 38DL Plus Ultrasonic Thickness Gauge
Olympus 38DL Plus Ultrasonic Thickness GaugeOlympus 38DL Plus Ultrasonic Thickness Gauge
Olympus 38DL Plus Ultrasonic Thickness GaugeStephenKim86
 
HOW TO START EARNING WITH AFFILIATE MARKETING
HOW TO START EARNING WITH AFFILIATE MARKETINGHOW TO START EARNING WITH AFFILIATE MARKETING
HOW TO START EARNING WITH AFFILIATE MARKETINGNATHAN SPEAKS
 
Unleashing the Power of Fandom: A Short Guide to Fan Business
Unleashing the Power of Fandom: A Short Guide to Fan BusinessUnleashing the Power of Fandom: A Short Guide to Fan Business
Unleashing the Power of Fandom: A Short Guide to Fan Businesstompeter3736
 
"InShorts: A Game-Changer in the Digital News Age"
"InShorts: A Game-Changer in the Digital News Age""InShorts: A Game-Changer in the Digital News Age"
"InShorts: A Game-Changer in the Digital News Age"Adharsh45
 
Streamlining Your Accounting A Guide to QuickBooks Migration Tools.pptx
Streamlining Your Accounting A Guide to QuickBooks Migration Tools.pptxStreamlining Your Accounting A Guide to QuickBooks Migration Tools.pptx
Streamlining Your Accounting A Guide to QuickBooks Migration Tools.pptxPaulBryant58
 

Último (20)

The Smart Bridge Interview now Veranda Learning
The Smart Bridge Interview now Veranda LearningThe Smart Bridge Interview now Veranda Learning
The Smart Bridge Interview now Veranda Learning
 
A Case Study On SQUARE GROUP Bangladesh.pdf
A Case Study On SQUARE GROUP Bangladesh.pdfA Case Study On SQUARE GROUP Bangladesh.pdf
A Case Study On SQUARE GROUP Bangladesh.pdf
 
Importance of Commercial Vehicle Insurance.pptx
Importance of Commercial Vehicle Insurance.pptxImportance of Commercial Vehicle Insurance.pptx
Importance of Commercial Vehicle Insurance.pptx
 
NewBase 14 March 2024 Energy News issue - 1707 by Khaled Al Awadi_compress...
NewBase  14 March  2024  Energy News issue - 1707 by Khaled Al Awadi_compress...NewBase  14 March  2024  Energy News issue - 1707 by Khaled Al Awadi_compress...
NewBase 14 March 2024 Energy News issue - 1707 by Khaled Al Awadi_compress...
 
We are inviting you on board, to move forward together in the Right Direction
We are inviting you on board, to move forward together in the Right DirectionWe are inviting you on board, to move forward together in the Right Direction
We are inviting you on board, to move forward together in the Right Direction
 
CORPORATE SOCIAL RESPONSIBILITY - FINAL REQUIREMENT.pdf
CORPORATE SOCIAL RESPONSIBILITY - FINAL REQUIREMENT.pdfCORPORATE SOCIAL RESPONSIBILITY - FINAL REQUIREMENT.pdf
CORPORATE SOCIAL RESPONSIBILITY - FINAL REQUIREMENT.pdf
 
Benihana of Tokyo case study11111111.pdf
Benihana of Tokyo case study11111111.pdfBenihana of Tokyo case study11111111.pdf
Benihana of Tokyo case study11111111.pdf
 
Shopclues: Failure & Solutions in Business Model
Shopclues: Failure & Solutions in Business ModelShopclues: Failure & Solutions in Business Model
Shopclues: Failure & Solutions in Business Model
 
L-1 VISA Business (Plan Sample) - Plan Writers
L-1 VISA Business (Plan Sample) - Plan WritersL-1 VISA Business (Plan Sample) - Plan Writers
L-1 VISA Business (Plan Sample) - Plan Writers
 
Wallet Pitch for startup fintech and loan
Wallet Pitch for startup fintech and loanWallet Pitch for startup fintech and loan
Wallet Pitch for startup fintech and loan
 
How The Hustle Milestone Referral Program Got 300K Subscribers
How The Hustle Milestone Referral Program Got 300K SubscribersHow The Hustle Milestone Referral Program Got 300K Subscribers
How The Hustle Milestone Referral Program Got 300K Subscribers
 
The Vietnam Believer_Newsletter_Vol.001_Mar12 2024
The Vietnam Believer_Newsletter_Vol.001_Mar12 2024The Vietnam Believer_Newsletter_Vol.001_Mar12 2024
The Vietnam Believer_Newsletter_Vol.001_Mar12 2024
 
PHX Corporate Presentation March 2024 Final
PHX Corporate Presentation March 2024 FinalPHX Corporate Presentation March 2024 Final
PHX Corporate Presentation March 2024 Final
 
unfinished legacy it is a clothing brand
unfinished legacy it is a clothing brandunfinished legacy it is a clothing brand
unfinished legacy it is a clothing brand
 
AirOxi - Pioneering Aquaculture Advancements Through NFDB Empanelment.pptx
AirOxi -  Pioneering Aquaculture Advancements Through NFDB Empanelment.pptxAirOxi -  Pioneering Aquaculture Advancements Through NFDB Empanelment.pptx
AirOxi - Pioneering Aquaculture Advancements Through NFDB Empanelment.pptx
 
Olympus 38DL Plus Ultrasonic Thickness Gauge
Olympus 38DL Plus Ultrasonic Thickness GaugeOlympus 38DL Plus Ultrasonic Thickness Gauge
Olympus 38DL Plus Ultrasonic Thickness Gauge
 
HOW TO START EARNING WITH AFFILIATE MARKETING
HOW TO START EARNING WITH AFFILIATE MARKETINGHOW TO START EARNING WITH AFFILIATE MARKETING
HOW TO START EARNING WITH AFFILIATE MARKETING
 
Unleashing the Power of Fandom: A Short Guide to Fan Business
Unleashing the Power of Fandom: A Short Guide to Fan BusinessUnleashing the Power of Fandom: A Short Guide to Fan Business
Unleashing the Power of Fandom: A Short Guide to Fan Business
 
"InShorts: A Game-Changer in the Digital News Age"
"InShorts: A Game-Changer in the Digital News Age""InShorts: A Game-Changer in the Digital News Age"
"InShorts: A Game-Changer in the Digital News Age"
 
Streamlining Your Accounting A Guide to QuickBooks Migration Tools.pptx
Streamlining Your Accounting A Guide to QuickBooks Migration Tools.pptxStreamlining Your Accounting A Guide to QuickBooks Migration Tools.pptx
Streamlining Your Accounting A Guide to QuickBooks Migration Tools.pptx
 

Come Together

  • 1. www.strategy-business.com strategy+business ONLINE MAY 4, 2016 Come Together The case for consolidation in U.S. retail and commercial banking. BY DOUG STOTZ, ARJUN SAXENA, AND SANCHIT TIWARI
  • 2. www.strategy-business.com 1 depositories as the U.K., Canada, or Australia. Whereas the top four to six banks in each of those countries ac- T he U.S. banking industry has largely sat out the impressive surge in mergers and acquisitions ac- tivity of the last few years. Total deal volume hit a record US$2.3 trillion in 2015 — up 64 percent over 2014. But banks accounted for just 3 percent of the total value, despite the fact that they account for 9.3 percent of total market capitalization. That’s about to change: We believe the pace of M&A in U.S. banking will ac- celerate sharply in 2016. The market structure of U.S. banking is obsolete, and the industry’s profitability has been weak for nearly a decade. Regulatory and competitive pressures are making it hard for most banks to grow revenues and profits. The convergence of these trends makes it im- perative that banks consolidate to gain scale and lower their cost structures. As a result, we expect to see significant consolidation among mid-tier players — those banks with between $10 billion and $250 billion in assets. Despite the failures of several large banks and hun- dreds of mergers in the past decade, the U.S. banking market remains significantly more fragmented than the markets of other large developed nations. State and fed- eral regulations — particularly a ban on interstate bank- ing — that remained in place until the 1980s discour- aged concentration in the banking sector. Although these restrictions have largely been repealed, the U.S. still has more than 15 times the number of regulated Come Together The case for consolidation in U.S. retail and commercial banking. by Doug Stotz, Arjun Saxena, and Sanchit Tiwari Exhibit 1: Top 20 Bank Market Shares by Consumer Banking Category The three largest banks have garnered the lion's share of growth in deposits and debit cards in recent years. Top 3 (Wells, BoA, JPM) Banks 4 to 20 Branches as of March 2015 18.0% 82.0% share Deposits as of March 2015 32.7% 67.3% Deposit Growth 2011–14 66.2% 34.8% Net Debit Card Growth 2011–14 96.7% 3.2% Note: Debit card growth used as proxy for checking account growth. Totals may not equal 100 due to rounding. Source: FDIC Summary Data (Mar. 31, 2015), Nilson Report (Apr. 2015)
  • 3. www.strategy-business.com 2 The Revenue and Profit Squeeze The primary driver for M&A activity is the difficulty that banks face in raising profits. Almost all U.S. banks are facing significant profitability problems. Returns on equity for 74 percent of banks with $10 billion to $150 billion in assets were below their long-term cost of capi- tal (approximately 10 percent) in 2014. As a result, price-to-book-value ratios are low by historical standards. And that makes the U.S. banking sector an attractive hunting ground for potential foreign acquirers and for activist investors. With activism rising across the industry, targets are no longer limited to small players, as shown by recent campaigns against larger specialized and regional banks. count for 90 percent or more of total deposits, even the 20 largest banks in the U.S. control only 59 percent of total deposits. Despite the fragmentation of the U.S. banking sys- tem, the very largest banks are capturing the lion’s share of growth in key lines of business. Between 2011 and 2014, the three biggest U.S. banks — Bank of America, JPMorgan Chase, and Wells Fargo — accounted for nearly two-thirds of deposit growth and virtually all the net growth in debit cards, which is a good proxy for consumer checking accounts (see Exhibit 1). Given their scale, these players can significantly out-invest other banks in brand marketing, data analyt- ics, and digital products and services. Doug Stotz doug.stotz@ strategyand.us.pwc.com is an advisor to senior execu- tives in the financial-services industry for Strategy&, PwC’s strategy consulting group. He is a principal with PwC US based in New York. Arjun Saxena arjun.saxena@ strategyand.us.pwc.com is an advisor to executives in the financial-services sector for Strategy&. He is a principal with PwC US based in New York. His focus is organic and M&A growth strategies. Sanchit Tiwari sanchit.tiwari@ strategyand.us.pwc.com focuses on growth strategies and banking and payments with financial-services clients for Strategy&. He is a director with PwC US based in New York. IllustrationbyMartinLeonBarreto
  • 4. www.strategy-business.com 3 consolidation can yield significant cost benefits. For a typical regional bank with retail and commercial busi- nesses, 30 percent of total costs are variable by volume, 35 percent are driven by the branch network, and an- other 35 percent are “scalable” costs driven by organiza- tional complexity. Consolidation can help control costs by shedding excess branch capacity, as well as by spreading fixed regulatory, legal, compliance, and other organizational costs over a larger base. KeyCorp’s proposed $4.1 billion acquisition of First Niagara Financial Group, an- nounced in 2014, is an example. KeyCorp plans to drive significant cost savings via an 11 percent consolidation of branches. Then it intends to reinvest part of the cost savings into online and mobile solutions and digital channels — where transactions are growing significant- ly faster than branch transactions — as well as in strate- gic partnerships to improve automation, regulatory compliance, and customer experience. For some smaller to midsized banks, building scale via M&A is crucial. Under legislation enacted in 2010, regulatory cost and complexity rise sharply for banks when total assets hit thresholds of $10 billion and $50 billion. For banks nearing these levels, acquiring or merg- The activists include Trian Partners (which has targeted BNY Mellon and State Street), Greenlight Capital (Cit- izens Financial, CIT Group), Basswood Capital Man- agement (Hudson Valley Bank, Synovus, Astoria Finan- cial), and Hudson Executive Capital (Comerica, CIT Group). This activity will likely increase. PL Capital has announced a new private equity fund focusing on banks with between $3 billion and $75 billion in assets. It is clear that banks will have difficulty boosting profits on their own. Merely to raise the return on eq- uity in the sector to equal their 10 percent long-term cost of capital, banks would need to increase cumulative pretax profits by 35 percent — a total of $38 billion per year. This increase would need to come from a combi- nation of cost reengineering and revenue growth. Improving the bottom line is likely to be difficult because the top line isn’t growing much. Overall reve- nues have been under pressure since their 2007 peak at the crest of the previous business cycle. Net interest in- come has been flat in the post-2007 era, thanks to the low interest rate environment and flat yield curve. Digi- tization and new regulations have also driven down vol- umes and margins across capital-markets and sales and trading businesses. Noninterest income has also been flat, due to a se- ries of postcrisis legislative initiatives that adversely im- pacted fee-based revenue in deposit taking, credit cards, and payments. Ongoing scrutiny from the newly creat- ed Consumer Financial Protection Bureau has driven down pricing and ancillary revenues in consumer-facing businesses like mortgages, deposit banking, credit cards, student lending, auto lending, and unsecured lending (see Exhibit 2). Banks have also ceded market share to nonbank players in businesses such as subprime lending, asset management, proprietary trading, and wealth manage- ment. In particular, nimbler, nonregulated financial technology players like LendingTree, Lending Club, and PayPal are intruding into the more lucrative, fee- based businesses of banks such as retail lending and global payments. Technology has lowered barriers to entry for these new competitors, with big data analytics and digital channels lowering costs of identifying and marketing to “cherry-picked” prospects. How Consolidation Can Help Given the anemic outlook for GDP and income growth, it will be difficult for the U.S. banking industry as a whole to show impressive top-line growth. However, Exhibit 2: Keeping Up Over the past several years, growth in banks’ income has kept pace with overall economic growth. 2000 2005 2010 2014 $0 $700 $800 $600 $500 $400 $300 $200 $100 0 20 40 60 80 100 120 140 Income (US$ Billions) GDP Index (2007) Net Interest Income Total Income Nominal GDP Non-Interest Income 2000–07 2007–15 5.5% 2.0% 5.1% 2.6% 5.0% 0.9% 5.9% 2.8% CAGR: Note: 2009–14 data affected by institutions that converted to bank holding companies during financial crisis (e.g., AXP, CIT, DFS GS, MS). Source: FDIC HSOB, Federal Reserve of St. Louis, Strategy& analysis
  • 5. www.strategy-business.com 4 than 10 percent of total U.S. deposits, would prevent any acquisitions of major depositories by JPMorgan Chase, Wells Fargo, or Bank of America. Several of the nation’s largest institutions are seeking to reduce their scale and complexity as a result of regulatory con- straints. So, too, are systemically important nonbank institutions such as GE Capital and MetLife. As a result, these larger institutions are exploring divestitures and spin-offs. For all these reasons, we believe that the needed consolidation will be concentrated among mid-tier banks. Based on our analysis, $600 billion worth of M&A would be needed to provide enough cost savings to boost the return on average equity of the sector by 2 percentage points — thus allowing it to earn its cost of capital. Over the next year or more, U.S. bank CEOs, CFOs, and boards of directors should give serious con- sideration to M&A as a strategic lever. They need to analyze and develop a view on whether they could drive cost efficiencies and revenue synergies as an acquirer, or potential shareholder returns as a target. They should articulate a deal thesis as part of their three- to five-year strategy, and consider whether there are unique capa- bilities that they would seek to obtain from, or contrib- ute to, a prospective deal. And they should conduct preliminary reviews of potential targets’ balance sheets, as well as their capabilities and customer profiles. Finally, they should also explore potential opportunities to accelerate growth of digital capabilities through investments in, or acquisitions of, financial technology players. A merger won’t always be a sufficient tactic for mid- sized banks to gain the scale and operating efficiencies needed to compete in today’s environment. But given the field in which they now compete, it may be a neces- sary one. + ing with another bank can effectively lower these costs by spreading them over a larger base. For example, New York Community Bancorp ($50.3 billion in assets) agreed to purchase Astoria Financial Corp. ($16.5 bil- lion in assets) in a $2 billion transaction announced in 2015. The combined company will have assets of some $64 billion, moving decisively past the $50 billion threshold. Deals to expand into adjacent products or markets or to add capabilities may also make strategic sense. Ex- amples include RBC’s recent acquisition of City Na- tional to add private banking and business banking to its U.S. retail brokerage and capital markets franchise; Capital One’s expansion into healthcare lending through the acquisition of GE Capital’s healthcare lend- ing business; and Barclays’ acquisition of Logic Group to enhance payment and loyalty technology capabilities. Vertical integration, such as CIT Group’s 2015 ac- quisition of OneWest Bank, is another option. The $3.4 billion deal enabled CIT to add a branch banking fran- chise to its commercial lending and leasing platform, creating greater liquidity and growing net interest mar- gin through replacing wholesale funding with cheaper retail deposits. . Shoring Up the Banking Sector It is clear that a healthy U.S. banking sector that earns its cost of capital, and that can continue to support the credit, payments, and risk management needs of an expanding economy, would be in the interests of cus- tomers, bank shareholders, regulators, and other indus- try stakeholders. The developments and trends we have outlined, however, demonstrate that significant consoli- dation is needed to enhance profitability and enable more banks to invest in growing markets and key strat- egic capabilities such as digitization, analytics, and brands. The challenge is that regulators are averse to the largest banking institutions (those deemed to be “sys- temically important”) getting any bigger. As a result, they have argued against further consolidation among top-tier banks. In any event, the national deposit cap, which prevents any single bank from amassing more
  • 6. strategy+business magazine is published by certain member firms of the PwC network. To subscribe, visit strategy-business.com or call 1-855-869-4862. • strategy-business.com • facebook.com/strategybusiness • linkedin.com/company/strategy-business • twitter.com/stratandbiz Articles published in strategy+business do not necessarily represent the views of the member firms of the PwC network. Reviews and mentions of publications, products, or services do not constitute endorsement or recommendation for purchase. © 2016 PwC. All rights reserved. PwC refers to the PwC network and/or one or more of its member firms, each of which is a separate legal entity. Please see www.pwc.com/structure for further details. Mentions of Strategy& refer to the global team of practical strategists that is integrated within the PwC network of firms. For more about Strategy&, see www.strategyand.pwc.com. No reproduction is permitted in whole or part without written permission of PwC. “strategy+business” is a trademark of PwC.