US regional banks: expect root and branch consolidation to ramify

In some ecological niches, only larger organisms thrive. The principle has applied to banking during the pandemic and in its aftermath. With branches closed, customers have gone online. This puts pressure on smaller lenders to boost IT spending. Low interest rates and tepid loan demand have made it tough for banks that lack economies of scale to profit from burgeoning deposits. To survive, they need to bulk up.

Webster Financial and Sterling Bancorp are the latest US regional banks to combine. Connecticut-based Webster is paying a premium to buy Sterling of New York state in an all-stock deal that gives the target an equity value of $5.1bn.

The new bank — which will retain the Webster name — will remain a minnow compared to giants such as JPMorgan and Bank of America. It will be America’s 39th-largest retail bank by assets ($63bn), with just over 200 branches.

M&T Bank’s $7.6bn deal to buy People’s United Financial earlier this year lent urgency to this deal, worth more than $10bn in aggregate. M&T and People’s operate in the north-east US too and have total assets of $200bn and 1,100 branches.

The steepening US yield curve has given Webster’s net interest margins a quarter-on-quarter boost. But the spread remains depressed compared with a year ago. First quarter loan growth of 2 per cent recorded was driven by commercial and real estate lending. With consumer credit in the doldrums, it makes sense to pool resources.

Webster and Sterling have overlapping business where overheads can be reduced, namely commercial lending and health savings accounts. Touted costs cuts of $120m, taxed and capitalised, should more than cover the 11 per cent premium that Webster is paying for Sterling in its own shares. 

This deal will not be the end of the consolidation story for Webster and its peers. Expect US bank mergers to continue. This will create a new tier of super-regional banks. These will be better capable of competing for resources both with each other and Wall Street’s megafauna.

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