There are NOT too many banks; new banks are needed

Editor's Note: This column was part of the Nov. 6 Pulse sent to more than 14,000 subscribers. If you’ve been following our news reports on BankNews.com you know that the pace of merger and acquisition announcements has increased recently, with several deals announced in the last month, after the year-to-date total on Sept 30 matched the full-year total for 2024 at 126 deals. This is, of course, mixed news as we are happy for those realizing their investment goals, but unhappy about industry contraction that leave us with an ever-smaller number of charters. .Perhaps you saw this clip on Bloomberg TV, featuring an executive who seems quite happy about the consolidation, saying 4,500 banks in the U.S. is too many. He predicts the pace of consolidation will increase even further, leaving the country with 1,000 to 1,500 charters in two to three years. He comments that community banks are too small to succeed, implying they need to achieve a return on equity of 10 percent or more “to something more credible.” I say baloney. Consolidation is occurring, but there will be far more banks remaining in three years than 1,000. Keep in mind that even if there were one deal announced every business day for the next three years, that would only be about 760 deals. (Keep in mind that between 2014 and 2019, some 250 deals per year was the standard.) Furthermore, most community banks achieve a return on equity of 10 percent or better. Looking at first quarter FDIC numbers, the aggregate industry ROE was 11.58 percent. Small banks (the 1,274 with less than $100 million in assets) did better than any other group, with an aggregate ROE of 15.62 percent. Banks with assets ranging from $100 million to $10 billion are generally in the high 10s. In fact, there are 2,726 charters in the country that reported an ROE of 10 percent or greater. Four-thousand-five-hundred banks is nowhere near too many for the United States. Thousands of borrowers depend on community banks to sustain or build their businesses. There are important reasons for every one of this nation’s banks to exist, return on equity being only one consideration. It is important for investors to be able to exit a bank investment when they feel it appropriate, but it is more important for an investor to be able to get into that investment in the first place. Buying an existing bank is one path, but another is starting a bank. Rather than humming a tune about the shrinking number of banks, we need to put more emphasis on the need to start new ones.