This Day On The Street
Continue to site
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

The Deal: Too Big to Merge?

One result of this re-regulation will see larger banks continue to divest assets to try and avoid more punitive rules or exit businesses that no longer provide sufficient return. This is part of a larger reshaping of the Wall Street, or wholesale, end of banking.

Since the credit crisis, Citigroup has been shedding pieces of its global consumer finance operations, including the sale of its final 35% stake in the former Smith Barney brokerage for $4.7 billion to Morgan Stanley this June. In May, Goldman Sachs sold the majority stake in its reinsurance business to high net worth clients for an undisclosed price and in July unloaded its hedge fund administration arm for $550 million to State Street. Also in July Credit Suisse Group sold its private equity and alternative assets business to Grosvenor Capital Management LP for an undisclosed sum. Bank of America has peddled off dozens of branches for an undisclosed price and divested its remaining 1% stake in China Construction Bank for $750 million this month while Barclays plc put its retail business in the United Arab Emirates up for sale. Morgan Stanley and JPMorgan are exploring sales of their commodities businesses.

Further divestments may be on the horizon. In November, the Basel committee will publish more information on the calculation of the proposed global SIFI buffer (another level of capital requirements for SIFI banks). This will enable U.S. SIFI banks to calculate and prepare for their higher loss absorbency requirements, which take effect in 2016. As they are able to better weigh the risks and returns of their business lines, further asset sales or re-pricing of risk could follow.

Spencer says more capital-intensive businesses that banks may seek to divest include commodities, derivatives, fixed income, sales and trading, and non-rated securities.

On the flipside, some investment bankers say wealth management remains an attractive sector for acquisitions, as it provides strong fee income without the need for additional capital holdings. Royal Bank of Canada (RY) chief financial officer Janice Fukakusa said in June that the bank was willing to pay up to C$5 billion ($4.8 billion) for wealth acquisitions, with Wells Fargo also voicing an appetite for the business. Historically, U.S. banks have a spotty record in the business.

"For large banks, wealth management is attractive because it diversifies their business lines [and] with the slowdown in mortgage origination, it's a healthy revenue offset," says Sharon Weinstein, head of Deloitte Corporate Finance LLC's financial institutions practice.

Spencer agrees but notes wealth management businesses are generally expensive to acquire, and require significant upfront capital. Big U.S. banks also once dominated wealth management through trust operations but lost out to more aggressive non-bank rivals such as investment banks and specialty asset managers in the '80s and '90s.

Among smaller banks, regulatory costs coupled with slow loan and deposit growth will be ongoing impetus for consolidation. "The only way you can get growth is either from niche businesses like energy lending or cutting costs via bank acquisitions. With less regulatory overhang these deals can get done," Spencer says.

Killian says the majority of bank holding companies, some 5,323 or 80% of the total, have less than $500 million in assets and will be largely unaffected by the new requirements. These smaller banks, however, comprise just 5% of bank assets in the U.S., with the bulk of assets held by 37 banks over $50 billion.

DLA Piper's Reed predicts that around 7,000 U.S. banks may consolidate to between 4,000-5,000 over the next five to seven years. "There are institutions that have no ability to grow because they can't raise capital -- they can't support acquisitions or organic growth, so there's a need for consolidation," he says.
[Read: <a target="blank" data-add-tracking="true" href=""><em>The 5 Dumbest Things on Wall Street This Week: Sept. 13</em></a>]

Despite the incentives for some banks to merge, other sources point to another, less obvious brake on deal activity: a perceived reluctance from the FDIC to approve deals. Dealmakers say potential clients have cited regulatory delays around M&T Bancorp's (MTB) $3.8 billion acquisition of Hudson City Bancorp (HCBK), announced last August. The deal is yet to close, with M&T Bancorp only reaching agreement with the Federal Reserve this June to improve its compliance before any merger takes place.

-- Written by Jane Searle in New York
3 of 3

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Real Money

More than 30 investing pros with skin in the game give you actionable insight and investment ideas.

Product Features:
  • Access to Jim Cramer's daily blog
  • Intraday commentary and news
  • Real-time trading forums
Only $49.95
14-Days Free
14-Days Free
BAC $14.77 0.00%
C $46.68 0.00%
GS $166.18 0.00%
JPM $63.79 0.00%
MS $27.26 0.00%


Chart of I:DJI
DOW 17,891.16 +117.52 0.66%
S&P 500 2,081.43 +16.13 0.78%
NASDAQ 4,817.5940 +42.2360 0.88%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs