Two banks, BB&T and SunTrust are getting together to form the sixth largest commercial bank in the United States, but, their leaders state, "It's all about technology!"
Has the revolution in information technology really reached its "tipping point" in the commercial banking industry, a sector that has been noted for its lagging use of this resource?
Regulatory pressures over the past ten years have prevented mergers among the larger commercial banks, although over the past ten 18 years, we have lost 234 institutions per year.
Analysts are wondering whether or not a successful completion of this merger might set off a "wave" of larger mergers to grab onto the advance of the technology.
“Technology was the main impetus for the deal, executives for BB&T and SunTrust said Thursday.” This quote is from the Wall Street Journal.
In the New York Times we read that while BB&T and SunTrust executives “plan to eliminate lots of jobs” in combining the two organizations, “they would plow the savings into technological innovations that fostered greater competition with the nation’s largest banks.”
When the combination is completed, the new bank will be the sixth largest bank in the United States in terms of asset size.
“The world is changing and we have to change,” BB&T Chief Executive Kelly King said.
This is all, I believe that needs to be said at this stage.
Kristin Broughton also writes in the Wall Street Journal,
“The transaction—the biggest bank deal since the financial crisis—will allow the former rivals to develop better technology together than they could on their own. They plan to reinvest $1.6 billion in projected cost savings from the merger into technology and innovation.”
“The companies also plan to create an innovation and technology center at the merged entity’s new headquarters in Charlotte, N.C., to drive digital transformation, including the adoption of automation and an improved customer experience online.”
The issue is one of scale. BB&T disclosed in November that its technology budget for 2018 was $1.1 billion. Bank of American, meanwhile, disclosed a total technology budget of about $10 billion.
And, while we are on the issue of scale, let me just bring in the issue of the “new” Modern Corporation that I have been writing about.
A major characteristic of the “new” Modern Corporation is that it is built upon intangibles, primarily intellectual capital. By creating platforms constructed out of this intellectual capital, it can build networks that can scale to enormous size, one major reason is that intangibles foundations can be expanded at zero or almost zero marginal cost.
This expansion is what we are seeing in the tech giants in the information technology field. And, scale comes to dominate products and markets. See current analysis of Alphabet, for example.
But, another important factor about banking…and finance. Banking…and finance… are just about information. All finance just reduces to numbers, which can easily be reduced to zeros and ones. That is, one of the original “information technology” industries was the finance industry.
And, this is what the big banks are going for. As Ms. Broughton writes,
“In recent years, big banks such as JPMorgan Chase & Co. and Bank of America Corp. have invested heavily in developing consumer-facing technology such as artificial intelligence-powered “chatbots” and digital investing apps. In the process, they also have added deposits at a faster clip than smaller peers.”
And the smaller banks that cannot meet this challenge, they just cannot create the scale without the technology to generate that scale. And, this is just what BB&T and SunTrust are saying.
Well, I have written a lot about this situation. For example, on October 22, 2018, I wrote “The Smaller Banks Are Going Out-Of-Business.” I followed this up with another post on the same subject on October 24.
The question is, why hasn’t this “break-out” come about earlier?
Well, there are two reasons. First, the American banking system has been built on the foundation of the small, “main street” bank. During most of US history, the larger financial institution was disliked and even despised. Banking structure and regulation was created to support a system that had lots and lots of local community banks. There are still many people in the United States that hate “Wall Street” and want to maintain and sustain the small community bank.
Only in the last forty years have we seen banking in multiple states, bank conglomerates, and other financial innovations brought to the banking industry. Even now, any further “opening up of the banking industry” is met with strong opposition.
Second, there has been a major restrain on bank mergers and acquisitions among the larger banks over the past ten years. The Great Recession and the financial turmoil coming from this period was met by legislative oversight that tightened up regulations and created an atmosphere that constrained bank managements. As mentioned above this merger is the first combination of larger banks in a long, long time.
Is this restraint easing up?
Some contend that there is a new attitude within the regulatory community, some of which has come about due to appointments made by President Trump to the Federal Reserve and other Washington agencies.
Others argue, that the time for further movement is here.
Over the past year or two, major conferences at MIT and elsewhere, several of which I have written about, have almost laughed at the commercial banking industry because, in the United States particularly, it is so far behind other industries in moving into the information age.
Have we reached the tipping point?
We’ll see. I would argue that if it is not been reached now…it soon will be reached.
And, this is why I argue that the smaller banks don’t have a chance. At the end of September 2018, there were 4,774 domestically chartered commercial banks in the United States.
At the end of the year 2000, there were 8,315 commercial banks in existence. Since then, we have lost an average of 234 banks per year, almost all of them the smaller institutions. Currently, we are losing about 175 commercial banks per year.
This is where the banking industry is going, down in size, up in scale.
What will the regulators do about this?
Well, commercial banking is one of the most heavily regulated industries in the world. As it moves into the world of the “new” Modern Corporation, and becomes more like the tech giants, who in reaching such a large size find that more and more people are calling for their regulation, it is going be interesting to see how the whole concept of “regulation” works itself out.
Oh, in terms of performance, BB&T has earned an average return on shareholder’s equity of 8.6 percent over the last five years and SunTrust has earned an average return on shareholder’s equity of 8.5 over the past five years. Both companies produced its first return on shareholder’s equity in excess of 10.0 percent in the past ten years, in 2018. The 10.0 percent hurdle is a cost-of-capital proxy.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.