JPMorgan Is Preaching to the Choir on Regional Bank Mergers

(Bloomberg Gadfly) -- JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon has been saying for a while now that there are too many banks. It appears that message has filtered through the ranks. 

Investment bankers at the New York lender are urging their U.S. regional bank clients to consider mergers as a way to stave off a pending deposit drain caused by changes in monetary policy, Bloomberg News reported late Monday. They make a valid point: the Federal Reserve's reversal of quantitative easing could indeed decrease deposits -- and smaller lenders may feel more of the pinch because their funding costs are higher than at the biggest banks, making it harder for them to compete for new deposits. 

But U.S. regional banks are already well aware of the need to consolidate. Management teams at lenders across the country have long considered deals as a way to expand market share in certain geographies, facilitate cost savings or simply drive growth and improve profitability. That's been even more the case lately, with many banks propelled into action ahead of potential tax reform and loosening financial regulations.

Already this year, we've witnessed almost one deal announced per week, and are on pace for the biggest number of U.S. bank mergers since 2014:

Banks are so acutely aware of the need to combine that they're paying the highest prices to do so since the crisis. Acquirers including Memphis, Tennessee-based First Horizon National Corp., Montebello, New York's Sterling Bancorp and Nashville, Tennessee-based Pinnacle Financial Partners Inc. agreed to rich takeover valuations to win their targets and were able to do so in part thanks to their own rising valuations, which has armed them with a stronger currency. 

As I've written, the Federal Reserve has already taken one step toward relaxing the regulatory burden for some regional banks mulling combinations. In March, it said acquisitions involving less than $10 billion of assets or deals that create lenders with less than $100 billion in assets do "not raise material financial stability concerns," an increase from $2 billion and $25 billion, respectively. 

That burden could be lightened further, especially if President Donald Trump's picks for leadership posts at key banking regulators such as the Office of the Comptroller of the Currency are more lenient than their predecessors. For instance, the pace of dealmaking will likely surge if -- under the guidance of the new Trump-selected appointees-- agencies signal that they'll approve transactions even if acquirers have various consent orders or flaws with their anti-money laundering and Bank Secrecy Act programs that currently restrict them from striking deals. 

One example of a sidelined participant is Investors Bancorp., a $4.3 billion New Jersey lender which was touted by Blue Harbour Group founder Cliff Robbins at Monday's Sohn Investment Conference as an acquisition candidate itself. What he failed to mention was the fact that lackluster Bank Secrecy Act conformance landed the bank in what its Chief Operating Officer Domenick Cama described as "BSA jail" on an earnings call last month. 

Rather than being a takeover target itself, Cama actually said the lender would eye acquisitions once it escaped from that jail. Whichever way the penny falls, Investors Bancorp is just one of a multitude of regional banks to realize that if they want to stay in the game, bigger is most definitely better.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Gillian Tan is a Bloomberg Gadfly columnist covering deals and private equity. She previously was a reporter for the Wall Street Journal. She is a qualified chartered accountant.

To contact the author of this story: Gillian Tan in New York at gtan129@bloomberg.net.

To contact the editor responsible for this story: Beth Williams at bewilliams@bloomberg.net.