There has been a decades-long trend of smaller banks getting hoovered up by larger banks in the US. Unlike some other countries, the US has thousands of banks—most of them small. But this has been changing as scale counts, and the need to invest and keep up with technology is pushing smaller banks behind.
Today, a report distributed by Morningstar emphasizes this phenomenon, noting that there were over 18,000 banks in the mid-1980s and under 4600 today. While consolidation has slowed to a three-decade low, it is still an ongoing trend, and the report anticipates that M&A is poised to tick up once again. Even while the emergence of too big to fail has dominated the regulatory chatter, Morningstar indicates that more consolidation is on the way.
The report states:
“The impact of scale is evident when looking at the efficiency ratios of different-sized banks, which illustrates the correlation between asset size and operating efficiency. For example, banks with $10 billion or more in assets averaged a structural cost advantage of approximately 18% compared to banks with under $100 million in assets over the past decade.”
Morningstar predicts that as large banks and non-banks providing financial services (Fintechs) pressure smaller banks, they will be compelled to consolidate. While Fintech and mobile banking can reduce operational costs as branches aren’t needed and everything happens in the cloud, investment in new technology is costly and scale helps in spreading these costs around.
