The biggest bank merger since the crisis may herald more

GIANT BANKS are made, not born. Today’s American behemoths were formed by a dizzying series of deals in the decade before the financial crisis. NationsBank and BankAmerica became Bank of America. Wells Fargo joined with Norwest. J.P. Morgan and Chase melded, and then bought Bank One. The crisis brought more mergers, but out of necessity as much as ambition: JPMorgan Chase took on Washington Mutual; Wells, Wachovia. But since the crisis hook-ups have been smaller. The very biggest banks are barred from retail acquisitions on competition grounds. Supervisors have become quicker at approving tie-ups between tiddlers.

On February 7th the big-deal drought ended. BB&T, based in Winston-Salem, North Carolina, and SunTrust, of Atlanta, Georgia, said that they would merge. The new, unnamed entity, valued at $66bn, will be far smaller than America’s biggest but far bigger than anything created since the crisis. It will be America’s sixth-largest retail bank by assets and, with $332bn, the fifth-largest holder of domestic deposits (see chart). Its business will be concentrated in the economically vibrant south-east. Both banks’ shares rose on the news.

That is unusual. Share prices, particularly those of acquirers, tend to slide when mergers are announced. On average, since 2015 acquiring banks have suffered a 3.3% decline. Yet BB&T, slightly the bigger of the pair, saw its price climb by 4.3%; SunTrust’s rose by 10.2%. (Investors are not alone: the head of another big bank applauds the extra scale.) The shares of the partners in a smaller deal unveiled on January 28th, TCF Financial, from Minnesota, and Chemical Financial, from Michigan, also went up.

Markets’ approval reflects two shifts that have made bank mergers more appealing. The first is an unwrapping of red tape. Last May Congress passed legislation to raise the asset threshold for complying with “enhanced prudential standards” to $250bn from $50bn. In October the Federal Reserve proposed raising the threshold at which it imposes its strictest capital and liquidity rules to $700bn from $250bn.

The combined BB&T and SunTrust can take advantage of this. As separate banks, both were close to Congress’s new $250bn limit—BB&T at $226bn, SunTrust at $216bn. Instead of edging over the line and facing the cost of complying with extra regulations individually, they can burst past it and share the burden. If the Fed goes ahead with its proposal the combined bank will have many years of organic growth ahead of it without needing to worry about the $700bn threshold.

The second change is that competition for deposits is heating up. Regional banks, of which BB&T and SunTrust are among the biggest, have competed with their national rivals through better local branch networks. But the giants, though banned from buying, are muscling in. Bank of America and JPMorgan Chase are rolling out around 500 branches each nationwide. Nor is physical banking the sole way to win deposits. Flashy apps and slick online banking matter ever more. This gives an edge to banks with big technology and advertising budgets. The national banks appear to be winning. The top three—Bank of America, JPMorgan Chase and Wells Fargo—snared $118bn of new deposits in 2017. Twenty regional banks attracted just $55bn.

To compete, regional banks need to bulk up. BB&T and SunTrust claim that they will lop $1.6bn, or 13%, off annual operating costs—a plausible estimate, says Keith Horowitz, an analyst at Citigroup, since a quarter of their branches are within two miles of a branch belonging to the other. The two headquarters will become one, in Charlotte, North Carolina, already the region’s banking capital (and home to Bank of America). There are sure to be lay-offs, though an elaborate executive transition has been worked out that appears to have pleased the occupants of both banks’ corner offices. These savings will release money to spend on making the merged bank fitter to compete. It will shell out an extra $100m a year on technology.

More mergers of regionals are likely. Betsy Graseck, an analyst at Morgan Stanley, notes a dearth of banks with assets between $500bn and $700bn. This leaves plenty of room for banks to merge and stay below the Fed’s putative new threshold. That said, Mike Mayo, an analyst at Wells Fargo believes there are few potential partners with an overlap that would yield the savings promised by BB&T and SunTrust.

Of course, even that deal has risks. Mr Mayo points out that attempts to merge incompatible back-office systems have proven disastrous in the past. But today’s technical challenges are smaller than those faced by banks merging two decades ago. A handful of companies now provide the technology used by thousands of banks for processing transactions and running websites. This reduces the chance of a slip-up.

Attracting new customers without alienating the old could be a higher hurdle. Both banks have a long local history. Their logos adorn sports stadiums in their home towns. SunTrust financed the international expansion of Coca-Cola, Atlanta’s most famous brand. Coke, in turn, held its secret soda recipe in a vault at SunTrust from 1925 to 2011. Customers of BB&T might be wary of a big merger. The bank saw a period of rapid growth after customers fled Wachovia, also based in Winston-Salem, after it was bought by Wells Fargo in 2008.

Elizabeth Warren, a Democratic senator and a presidential candidate for 2020—and a vocal critic of big banks—thinks that the BB&T-SunTrust deal will create another bank that is “too big to fail”. She believes that deregulation will call forth a wave of mergers that will hurt consumers.

Yet the new bank will be less than one-sixth of the size of the biggest. Though America has 5,000 banks, the top three control a big and rising share of the market. In 2007, just before politicians panicked about banks being too big to fail, they held 20% of deposits. Now they have 32%. Bigger regionals should be better equipped to take on the giants. Goliath is winning, says Mr Mayo. Time to beef up David, then.