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16 Nov 2020 By John Foley

American financial firms dominate the planet, but the real treasure trove sits buried beneath their back yard. PNC Financial Services’ merger with the U.S. business of Spanish lender BBVA shows the potential value that could be unlocked from crunching together the thousands of banks that litter the United States. Some lawmakers don’t love the idea of such deals, but handled carefully, such consolidation would be a good thing.

PNC boss Bill Demchak believes he can cut 35% of the costs BBVA incurs from running its U.S. bank. That’s a chunky sum, but broadly in line with other bank mergers like the 2019 fusion of BB&T and SunTrust, or Fifth Third Bancorp and MB Financial, which united in 2018. But the battered valuations of U.S. banks make those spoils even more valuable in relative terms. Demchak’s $900 million of saved annual expenses would be worth $7 billion, taxed and capitalized – roughly two-thirds of the deal’s cost.

That comes with red tape, of course. BB&T and SunTrust, now rechristened Truist Financial, were hauled in front of Congress to face questions from lawmakers concerned about job losses and risks to financial stability, and had to slow their plans to close some branches. Maxine Waters, the Democrat who heads the House of Representatives’ Financial Services Committee, openly opposes the creation of “megabanks.” Some $564 billion of combined assets definitely puts PNC and BBVA in her sights.

Waters is right to point out that banks haven’t exactly behaved impeccably over the years. Nonetheless, more mergers among mid-sized lenders would be welcome. At present, the market manages to be both highly fragmented and pretty concentrated. There were over 4,400 U.S. banks at the end of June, according to the St. Louis Fed. Yet the biggest four – JPMorgan, Bank of America, Wells Fargo and Citigroup – hold around one-third of all of the country’s deposits, according to their filings and Federal Reserve data.

The timing looks pretty favorable, too. Banks will struggle to grow if low interest rates continue to be the norm, which makes squeezing costs enticing. And an impending political changeover needn’t be an obstacle. While President-elect Joe Biden may share some of his Democratic colleagues’ concerns about banks that are too big to fail, that’s all the more reason to encourage the creation of lenders who can challenge the cozy oligopoly.


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