There were 249 bank mergers in 2019, totaling $57.68 billion which was almost double the valuation of the previous year. The high value was a result of the merger of SunTrust Banks Inc. and BB&T Corp. — the biggest bank merger deal in over ten years. The acquisition trend is expected to continue while the economy is currently in a fragile state, and economists predict that low-interest rates will continue as borrowers exercise caution and avoid further debt.
In today’s fragile economic climate, banks are seeking to be acquired by another bank or acquire one themselves due to the rising costs of technology and the constraint of record-low interest rates on the profitability of bank loans. Larger institutions have bigger deposit sources (the most affordable source of funding in the industry today), making it easier for them to keep up with these costs. Bank acquisitions and mergers give these institutions the opportunity to upscale their operations and geographic footprint more rapidly.
While acquiring a bank or being acquired by a larger institution is a strategic move, it can have drawbacks. Here, we weigh some of the costs and benefits of bank mergers so you can judge whether or not such a move is recommended for your institution.
The Benefits of Bank Acquisitions
Achieve Growth Goals
Every bank is always on the lookout for new customers, and perhaps the fastest way to gain them is by acquiring or merging with another bank. In doing so, your institution instantaneously gains access to more capital, new customers, a larger geographic service area, and many other resources you need to achieve your growth goals.
Increase Operational Efficiency
If your institution is looking for ways to increase its operational efficiency, acquiring or merging with another institution is a great way to do it. The largest regional banks usually have access to better technology, which could then be used to automate mundane banking functions and help employees be more efficient with their time. Established banks also tend to have larger and more experienced teams, and merging with one may mean strong new leadership and capable new team members that could make meaningful contributions to your operations and increase efficiency.
The Drawbacks of Bank Acquisitions
Risk of Customer Disapproval and Failure
When a small, community-based bank merges with a larger one, it can entirely change the culture of an institution — not always a good thing. Just because it makes fiscal sense to merge doesn’t mean that two institutions are a good fit for each other. If the executives of a bank don’t dedicate themselves to carefully merging their cultures and resources, the acquisition could fail completely.
What’s more, members tend to join local banks because they’re drawn to institutions that are in touch with community needs and can offer more personalized services; they may not approve of a merger with a larger corporation. Being acquired by another bank could cause you to lose business if you aren’t in touch with the needs and values of those you serve.
Problems With Compliance
The finance world is riddled with complexities. Banks must follow industry and federal regulations, and in order for a merger to be successful, both banks must understand them, work together, and abide by compliance regulations in the integration process. Failure to take proper care could be a fatal misstep for institutions.
The rest of 2020 is forecasted to be a big year for bank acquisitions and mergers. The U.S. is home to over 5,000 banks, and slowing profits are setting the stage for a raft of merger deals. Carefully consider the information above to ensure that a merger or acquisition is the right move for your institution.