Challenges and Opportunities Ahead in the Banking  Sector

I am at the Bank Director Magazine Acquire or Be Acquired Conference in Phoenix, AZ this week. Over 1,000 bankers have gathered to talk about M&A and growth strategies in the current low growth economy.

With an economy that will find it challenging to grow GDP at 2%, banks will have a difficult time growing the top and bottom line. The path to earnings growth is going to be M&A, cost control, and share buybacks.

Bank Director Event: Outlook Bright for Larger Banks

The industry is in fantastic shape right now, especially for larger banks. Credit conditions are the best they have been since the global recession, and capital levels are at an 80-year high. Credit has improved for 35 straight quarters, which is the best performance since 1991. Banks have become much more efficient as well and have mastered the art of cost-cutting.

The non-interest expense as a percentage of assets is at the lowest level in more than a decade and is almost 20% below the historical average.

Industry conditions favor the bigger banks right now. The sweet spot in terms of return on assets favors those banks with more than $50 billion in assets. Those banks with less than $500 million are earning much lower returns and are struggling to keep up with increasing regulatory and compliance costs. Many of them will be forced to make the decision to sell the bank in the next year.

Banks have been consolidating since 1985 when the Reagan administration passed the interstate banking bill. At that time, there were more than 18,000 banks in the United States, and today there are just 5,368.

Based on the conversations I am having in Phoenix I think that the trend will continue until the total number of banks is less than 2000. The low growth environment should mean that 2020 is a very active year for bank M&A activity with most of the deals involving smaller community banks.

Recent: Black Tuesday: Banks on Both Sides of the Atlantic Announce Major Job Cuts

Tim Melvin