Bank Consolidation Will Center on This U.S. City

KBW analyst Christopher McGratty, in a report Wednesday, said earnings pressure on banks "are real and will likely continue, especially if we stay on the path of low rates and slow economic growth. However, with greater confidence in bank balance sheets today, we view the current environment as nearly ideal for a pickup in consolidation."

"Looking ahead, estimating the ultimate number of banks that will be consolidated over the next cycle is an often-asked, but nearly impossible, question to answer," McGratty wrote. "However, with virtually no new bank charters granted in 2011 or 2012 (versus median of about 150 annually from 1990-2008), a more recent but seemingly structural move toward fewer and smaller branches, and continued headwinds impacting group profitability, all signs seem to be pointing toward fewer banks in the coming years."

KBW's data for the 10 largest metropolitan statistical areas (MSAs) indicate that Charlotte, N.C., is the "most consolidated," with Bank of America (BAC) owning an 80% market share of deposits, while Wells Fargo (WFC) has a 13% share, from its purchase of Wachovia in 2008.

In order to rank the MSAs by level of consolidation, KBW calculated the market-share percentage for the biggest 10 banks in each area. According to this approach, Miami is the "least consolidated," with the biggest 10 players controlling 68% of deposits, followed by Chicago, where the 10 leading players have a 69% share, and Boston, where the largest 10 area players have a 75% market share.

McGratty said "we find Chicago to be more competitive and less profitable compared to other major markets -- neither of which are likely to abate -- but both of which support greater M&A activity."

The Chicago Market

There are 565 banks in Illinois, running a close second among states to Texas, with 579 banks. For Illinois, "this dynamic [was] originally the result of historical limitations on branch banking (i.e., unit banking laws) that were only loosened within the past 45 years and entirely eliminated only within the past decade," according to McGratty. The analyst added that "9% of all domestic banks call Illinois home although this market only accounts for 4% of total domestic deposits."

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