Transcript Bank Mergers (1990 – 2006)

Bank Mergers (1990 – 2006)
Determining the Drivers Behind the
Mega-merger Wave
Overview
 Bank mergers have decreased the
number of banks from 16,000 to
8,000 starting from the early 1990’s
 The top 10 firms’ market share
increased from 22% to 46%
 Three “super-power” bank holding
companies have emerged (CitiGroup,
Bank of America, and JP Morgan &
Chase
Bank Competition …?
 Have bank mergers decreased
competition? (no, due to geographic
expansion instead of local
concentration)
 BUT… new technology can change this
 Now with electronic banking, larger
firms can advertise more and attract
more customers
 What will happen to the small banker?
Mergers Playbook (Top 4)
Date
Acquirer
Acquired bank
Name of merged entity
1998 NationsBank Corp.
BankAmerica Corp.
Bank of America Corp.
1998 Travelers Group
Citicorp
Citigroup
J.P. Morgan & Co. Inc.
J.P. Morgan Chase & Co.
2001 First Union Corp.
Wachovia Corp.
Wachovia Corp.
2002 Citigroup Inc.
Golden State Bancorp, Inc.
Citigroup Inc.
2004 Bank of America Corp.
FleetBoston Financial Corp.
Bank of America Corp.
2004 J.P. Morgan Chase & Co.
Bank One
JPMorgan Chase & Co.
2004 Wachovia
SouthTrust
Wachovia
Golden West Financial
Wachovia
1999
2000 Chase Manhattan Corp.
2001
2003
2005
2006
2006 Wachovia
Which BHC’s are the largest?
Institution Name (RSSD ID)
Location
Total
Assets
Total
Equity
Net
Income
ROA
ROE
CITIGROUP INC. (1951350)
NEW YORK, NY
1,494.04
112.50
24.59
1.65%
21.9%
BANK OF AMERICA CORPORATION (1073757)
CHARLOTTE, NC
1,294.32
101.50
16.46
1.27%
16.2%
JPMORGAN CHASE & CO. (1039502)
NEW YORK, NY
1,198.94
107.20
8.48
0.71%
7.9%
WACHOVIA CORPORATION (1073551)
CHARLOTTE, NC
520.76
47.56
6.64
1.28%
14.0%
WELLS FARGO & COMPANY (1120754)
SAN FRANCISCO, CA
481.74
40.66
7.67
1.59%
18.9%
HSBC NORTH AMERICA HOLDINGS INC. (3232316)
PROSPECT HEIGHTS, IL
404.25
30.92
3.25
0.80%
10.5%
TAUNUS CORPORATION (2816906)
NEW YORK, NY
364.70
4.56
0.01
0.00%
0.2%
U.S. BANCORP (1119794)
MINNEAPOLIS, MN
209.47
20.09
4.49
2.14%
22.3%
SUNTRUST BANKS, INC. (1131787)
ATLANTA, GA
179.71
16.89
1.99
1.11%
11.8%
Source: http://www.ffiec.gov/nicpubweb/nicweb/Top50Form.aspx
Banking Structure and Profitability
• In the upper banking tier, most
banks are less than $100B in assets
40
35
No of Banks
30
• Three banks are larger than
$1100B in assets – “super powers”
• Would you want to be the $10B
bank or the $1100B bank?
25
20
15
10
5
0
10 100
100 - 300 - 500 - 700 - 900 - 1100 - 1300 300
500
700
900 1100 1300 1500
Asset Size Class ($B)
Full
Sample
$14B $100B
$100 $300B
$300B $500B
$500 $700B
$1100B $1300B
$1300B $1500B
Profitability ROA (%)
1.23%
1.27%
1.26%
0.80%
1.28%
0.99%
1.65%
ROE (%)
13.6%
13.3%
15.0%
9.9%
14.0%
12.1%
21.9%
9.41
10.04
8.70
5.78
9.13
8.39
7.53
50
34
9
3
1
2
1
171.7
44.2
147.0
416.9
520.8
1,246.6
1,494.0
Leverage
Equity/Asset Ratio
Sample
No of Firms
Avg. Total Assets ($B)
• There is no clear
profitability
winner
• Which banking
segment would
you like to be?
25%
3%
20%
2%
15%
2%
ROA (%)
ROE (%)
Closer Look at Financial Performance
10%
1%
1%
5%
0%
0%
0
500
1,000
1,500
Assets ($B)
• Wide scatter among BHC’s
less than $100B
• Few data points >$100B
• Although trend line slope is
positive, it is not
statistically significant
• No statistical conclusion
0
500
1,000
1,500
Assets ($B)
• Wide scatter among BHC’s
less than $100B
• Few data points >$100B
• Although trend line slope is
negative, it is not
statistically significant
• No statistical conclusion
What about % Overheads?
• Another way to look at BHC
performance is % overheads
relative to BHC asset size
• Due to small number of data
points in larger asset
classes, trend line slope is
not statistically significant
1000%
Overhead (% of Assets)
900%
800%
700%
600%
500%
400%
300%
200%
100%
0%
0
500
1,000
1,500
• BUT… it looks as if the megabanks are at least equal to
the smaller banks
Assets ($B)
What does all of this mean?
Conclusions
 Visual inspection reveals that ROE
and ROA and similar between $100B
and $1100B bank holding companies
 Executive compensation tied to asset
size of BHC
 Larger BHC can diversify risk better
 Why not merge banks?
 Better executive compensation and
lower potential risk…
 Your opinion?