7 Bank M&A Trends for 2016

With this morning’s news that Huntington and FirstMerit are set to merge, it is clear that more and more buyers & sellers are getting off the sidelines and into the bank merger and acquisition (M&A) game.  So in advance of Bank Director’s 22nd annual Acquire or Be Acquired Conference, seven M&A trends to consider.

By Al Dominick, President & CEO, Bank Director

As I shared in yesterday’s post, we are putting the finishing touches on this year’s Acquire or Be Acquired conference. With nearly 600 bank officers & directors from 300+ banks joining us at the Arizona Biltmore for “AOBA” this Sunday through Tuesday, what follows are seven trends in bank M&A that I expect this hugely influential audience to hear and work to address.

  • Deal volume is holding steady; however, median deal price is on the rise.  One caveat: pricing has a strong correlation to both the size & location of a seller + the size of the potential buyer.
  • Growing banks must seize upon opportunities based on future needs, not just present needs
  • At the same time, more investors are taking a “what have you done for me lately” approach and emphasizing nearer-term results. Further, activist investors are becoming more prominent and driving some of this action.
  • Capturing efficiencies continues to be one of the most compelling forces driving industry consolidation.
  • When people tell you that size doesn’t matter, realize that banks with less than $500 million in assets have had the lowest return on equity for 11 out of the past 12 quarters (per SNL). Expect even more sellers to emerge from this part of the industry.
  • As the regulatory environment becomes increasingly difficult to maneuver, it is safe to anticipate an increase in merger activity — mostly for banks with less than $50 billion of assets.
  • As evidenced by Huntington Bancshares announcing today that it would buy FirstMerit Corporation in a deal worth $3.4 billion in stock and cash, mergers are a viable option for growth among the larger regionals.  While we don’t have the same kinds of national consolidators buying up banks like they once did, deals like this one, KeyCorp announcing it would buy First Niagara Financial Group and New York Community Bancorp that it would buy Astoria Financial at least opens the possibilities of larger players getting back in the merger game.

Whether you are coming to the conference or just interested in following the conversations, I invite you to follow me on Twitter via @AlDominick and/or @BankDirector — and search & follow #AOBA16 to see what is being shared with and by our attendees.

FI Tip Sheet: The Innovator’s Dilemma

Over the past few years, I have seen significant change within the banking community — much of it defensive or in response to government intervention and oversight.  According to a white paper recently published by McLagan, “a great deal has been said about the excesses and errors of the past; however (sic), the current focus for banks, in particular, must be on the need to innovate or risk becoming stagnant and losing the ability to compete for exceptional talent.”  This morning’s column focuses on the “innovator’s dilemma,” vis-a-vis three questions.

Everything is AwesomeDo We Need Sustainable or Disruptive Technology ?

I have talked with a number of Chairmen and CEOs about their strategic plans that leverage financial technology to strengthen and/or differentiate their bank.  After one recent chat, I went to my bookshelf in search of Clayton Christensen’s “The Innovator’s Dilemma: When New Technologies Cause Great Firms to Fail.”  His book inspired today’s title — and fuels this first question.  Christensen writes about two types of technologies: sustaining and disruptive.  Sustaining technologies are those that improve product performance.  As he sees it, these are technologies that most large companies are familiar with; technologies that involve improving a product that has an established role in the market.  Most large companies are adept at turning sustaining technology challenges into achievements.  However, large companies have problems dealing with disruptive technologies — an observation that, in my view, does not bode well for many traditionally established banks.

“Discovering markets for emerging technologies inherently involves failure, and most individual decision makers find it very difficult to risk backing a project that might fail because the market is not there.”

While risk is inherent to banks of all sizes, taking chances on emerging technologies continues to challenge many officers and directors.  To this end, I thought about the themes explored in Christensen’s book after spending time in Microsoft’s New York City offices last week.  While there, I heard how big banks are generating revenues by acquiring new customers while retaining, up-selling and cross-selling to existing customers.  I left impressed by the various investments being made by the JP Morgans of the banking world, at least in terms of customer relationships and experience management along with analytics and core system modernization.  I do, however, wonder how any entrenched bank can realistically embrace something “uber-esque” (read: disruptive) that could truly transform the industry.

Do We Have the Staff We Need?

Consider the following question from the perspective of a relatively new hire: “I have a great idea for a product or service… who can I talk with?”  A few months ago, Stephen Steinour, the President & Chief Executive Officer at Huntington Bancshares, keynoted Bank Director’s annual Bank Executive & Board Compensation conference and addressed this very thing.  As he shared to an audience of his peers: “the things I assumed from my era of banking are no longer valid.”  Rather than tune out ideas from the field in favor of age and experience, he explained how his $56Bn+ institution re-focused on recruiting “the right” employees for the company they wanted (not necessarily what they had), with a particular emphasis on attracting the millennial generation into banking.  He admitted it’s a challenge heightened by public perception of the industry as one that “takes advantage of people and has benefited from government bailouts.”  Still, he made clear the team they are hiring for reflects a new cultural and staffing model designed to drive real, long-term change.  I wonder how many banks would (or could) be so bold?

Do We Have The Right Business Model?

I’ve heard it said that “forces of change” will compel banks to reinvent their business models.  Take the business model of core retail banking. According to a piece authored by McKinsey (Why U.S. Banks Need a New Business Model), over the past decade, banks continued to invest in branches as a response to free checking and to the rapid growth in consumer borrowing.  But regulations “undermining the assumptions behind free checking and a significant reduction in consumer borrowing have called into question the entire retail model.  In five years, branch banking will probably look fundamentally different as branch layouts, formats, and employee capabilities change.”  Now, I’m not sure banking’s overall business model needs a total overhaul; after all, it still comes back to relationships and reputations.  Nonetheless, many smaller banks appear ripe for a change.  And yes, the question of how they have structured their business is one some are beginning to explore.

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To comment on this piece, click on the green circle with the white plus sign on the bottom right.  Looking ahead, expect a daily post on About That Ratio next week.  I’ll be in Nashville at the Hermitage Hotel for Bank Director’s Bank Board Training Program.  Leading up to, and at, this educational event, I’ll provide an overview on the various issues being covered.  Namely, risk management and auditing issues, compensation, corporate governance, regulation and strategic planning.  Thanks for reading, and Aloha Friday!

On Fee Income + Staying Relevant

Cloud Gate in Millennium Park
Cloud Gate in Millennium Park

So I shared my excitement for the RedSox World Series victory earlier today… Before I pack my things for a trip to the JW Marriott in Chicago, let me share three things I learned this week that relate to bank CEOs and their boards, not baseball and beards.

(1) As our very talented editor, Jack Milligan, wrote in the current issue of Bank Director, when it comes to fee income, “drivers tend to fall into three general categories, beginning with a variety of consumer-based fees from such things as foreign ATM withdrawals, overdraft protection plans, debit card transactions and some checking accounts.”  I bring this up as Jack and the team at Bank Director magazine ranked the top 50 publicly traded banks based on their ratio of non-interest income to total operating revenue for 2011 and 2012. The totals for both years were then averaged, which determined the order of finish. All banks listed on the New York Stock Exchange and NASDAQ Stock Exchange were included in the analysis (which was performed by the investment banking firm Sandler O’Neill + Partners in New York). At the top of the ranking are New York-based Bank of New York Mellon Corp., State Street Corp. in Boston and Chicago-based Northern Trust Corp.  For a full look at the results, click here.  For the story itself, register for free on BankDirector.com to access the digital issue of the magazine.

(2) Clearly, banking’s profit model is going through a period of transition.  Here, companies like StrategyCorps play an interesting role in helping financial institution meet their needs for more fee income without upsetting its customers.  No one — at least, that I know — wants to  pay for basic, traditional retail banking services.  They resent when a new fee is added on to an existing free service or product with no additional value (case-in-point, Bank of America’s $5 debit card fee debacle).  So as Mike Branton wrote in the Financial Brand, “financial institutions must seek new ways to incorporate non-traditional services that connect with consumers’ lifestyles.”  StrategyCorps took to Finovate’s Fall stage in NYC in September to demo, in less than 7 minutes, how financial institutions can use an enhanced mobile experience to successfully bring in fee income.  Take a look.

(3) Finally, I will be tweeting throughout our annual Bank Executive & Board Compensation conference next week (using hashtag #BEBC13).  This year’s 9th annual event focuses on compensation trends, talent acquisition/attraction and retention strategies. In addition, it looks at how the next few years’ merger activity might influence incentive compensation plans and performance-based pay structures.  I intend to post a few “postcards” from Chicago throughout the week — the first (tentatively set for Tuesday) on how companies develop executives, attract leadership and approach compensation in today’s highly competitive and economically challenging world.

Aloha Friday!

Snowquester’d

The White House on 12/18/09
My attempts at photography: the White House on 12/18/09…

Summary: Yes, it’s snowing in the DMV… no, this picture of the White House doesn’t capture today’s totals just yet.  Nonetheless, the run on gas, food and firewood started early yesterday.  So what better time to post something new to About That Ratio than with the snow coming down and the power and wi-fi still on?

I’ve already touched on “Rebooting the Bank;” with today’s piece, I’m taking a look at “rebooting the branch.”  Whereas Brett King inspired my previous entry, credit for today’s falls to PwC.

Recently, I’ve had the chance to talk with several of the firm’s partners about the rise of the digitally driven consumer and commensurate high-cost infrastructure of physical banking locations.  I believe we’re in agreement that if the branch model stays on its current course, it will become a financial burden to banks; ultimately, cutting deep into cross-channel profitability.  So today, I thought to share some information produced by PwC that looks at reinventing branch banking in a multi-channel, global environment.

Yes, the branch of the future has a critical place in banks’ overall channel strategy.  However, in its December “FS Viewpoint,” the professional services firm cites the cost of a branch transaction being approximately 20x higher than a mobile transaction… and more than 40x higher than an online one.  Consequently, banks are beginning to adopt a mix of the following five branch models in order to compete and improve their ROI:

  1. Assisted self-service branches that cater to retail and small-business customers on the go with high-function kiosks;
  2. In-store and corporate branches; for example, in grocery stores and corporate office buildings;
  3. Full-service branches that provide one-stop banking (sales and service) to retail and small-business customers who prefer privacy and face-to-face interactions;
  4. Community centers that have a smaller footprint than traditional branches; and
  5. Flagship stores that deliver sales and advisory expertise while showcasing emerging capabilities to sophisticated customers.

The logic behind a mixed approach?  It increases the bank’s geographic relevance to consumers and balances customer needs, revenue opportunities and cost to achieve growth.

Anecdotally, I’ve recently talked with two CEOs, Ray Davis from Umpqua and Stephen Steinour from Huntington, about their branching strategies in advance of keynote speeches they’ve made at our Acquire or Be Acquired and Lending conferences.  It strikes me that when banks like theirs assess a prospective branching opportunity, they deliberate on things like:

  • How do you develop specific financial criteria for measuring branch performance;
  • How do you decide whether the best path to building customers is adding branches, or operating with a more centralized marketing strategy; and
  • What are the advantages — and potential pitfalls — of growing a branch network.

So as the snow continues to fall outside, I’m digging deeper into PwC’s perspectives.  As a “bonus” to the white paper referenced about, let me also share a video from the firm “Look Before You Leap: Analyze Customer and Business Impact Carefully Before Implementing Product Change.”  While the title is a mouthful, the message, pretty succinct.