The results of the Federal Reserve’s recent Comprehensive Capital Analysis and Review (CCAR) stress tests have increased the long running speculation that another round of rampant bank mergers may by just around the corner. The number of banks in the U.S. is about half of what it was in 1990, and I don’t see anything changing that trend line.
The most recent spate of bank failures peaked in 2010 with 157, and despite all the headlines, this was significantly lower than the prior peak of 281 failures in 1990. But the primary driver of consolidation in the industry over time has actually been mergers, not failures. Merger activity increased every year from 1992 to 1995, peaking at 606 that year. During that run-up, the number of mergers ranged from 3.7% to 6.1% of the total number of banks.
In 2011 there were only 167 mergers, equal to only 2.8% of the total number of banks, so it would appear that there is plenty of room for additional consolidation. Stubbornly difficult rates of unemployment, housing prices and loan demand make it challenging to achieve decent ROE growth, and the stronger banks have significant advantages over the weaker ones.
Worse, all of those banks competing (all too often on price alone) for a larger share of a slow growing market will likely cause further margin erosions. And again, the stronger banks are better positioned to withstand these pressures too.
Serge Millman of Optirate recently noted that banks are battling with 27 competitors in a typical market, and that 66% of all deposits are held by banks competing in regions with 50 or more competitors!
Since 1990 there have been an average 6.5 mergers for every failure, more than triple the 2011 rate of 1.8 to 1, and the peak of the last cycle was a whopping 598 to 1 in 1997.
Throw in the hassle and expenses of complying with the hundreds of new rules coming out of Dodd-Frank (most of which are nowhere near finalized), and it isn’t hard to imagine many bank directors deciding to sell in the not-too-distant future.
