Business Consultant Jasdeep Singh Believes Banks Are About to Get Bigger

Banks are likely to merge over the next years as near-zero interest rates in the United States and globally will force financial institutions to shrink their operations to grow their profitability, according to UConn MBA graduate Jasdeep Singh.

Analysts around the world have been anticipating this consolidation in the banking sector ever since the pandemic started, as central banks around the world have been forced to slash interest rates and adopt extremely accommodative monetary policies to contain the financial fallout caused by the COVID-19 outbreak.

As a result of these measures, bank’s profits are likely to remain under pressure over the next few years as central banks are unlikely to pull off that support – especially after one considers that they have been unable to do so since they started expanding their balance sheet during the financial crisis of 2007-2008.

What’s the upside of consolidating?

Banks will look for ways to increase their profits over the coming years as interest income keeps shrinking and one way to achieve this is to reduce their operating expenses by reducing the number of branches and job positions available – along with other measures.

Mergers are one alternative to accomplish this goal, as large banks can acquire smaller ones that operate in similar markets to close any redundant branches – which would reduce operating expenses right away.

Furthermore, higher loan volumes coming from these operations could reduce the impact that operating expenses have on their bottom-line as a result of economies of scale.

This consolidation process has been widely anticipated by top analysts from institutions like the ING Group and the Boston Consulting Group (BCG).

In fact, in a recent report called “What’s Next for US Banking Consolidation in the Post-COVID-19 World?” BCG analysts stated that industry consolidation was already in motion before the virus situation started, although the pandemic contributed to slow down the process.

To some extent, it appears that liquidity issues are no longer a factor pushing this trend forward, as central banks have provided strong safety nets for banks and capitalization levels remain strong as indicated by the latest stress tests conducted by the Federal Reserve.

However, profitability concerns remain the primary driver for consolidation although the report from BCG highlights that we should not expect a “tsunami” of mergers and acquisitions as finding strategic targets remain a challenge for acquiring banks.

A similar trend is also showing up in Europe

Same as in the United States, European banks are also seeing the benefits of consolidation as shown by recent transactions including the acquisition of UBI Banca in Italy by Intesa Sanpaolo and the merger between CaixaBank and Bankia in Spain.

Meanwhile, other deals like the merger between Deutsche Bank and Commerzbank unfortunately did not come through but it showed that even big banks are looking for ways to increase their profitability by finding synergies and potential cost savings through mergers and acquisitions.

How could this trend affect consumers in the United States?

Consolidation in the banking sector could lead to fewer choices for consumers in the US, as big banks could end up acquiring multiple regional banks in an effort to increase the amount of deposits they hold while also reducing the number of branches covering the same areas.

This could have an impact on the relationship between the bank and its customers in different geographical areas as internal policies and procedures tend to vary from one bank to the other.

Furthermore, a shift toward digital banking and other similar technologies is likely to affect the way banks interact and relate with customers as part of their effort to save money. This could result in changes in the way certain services are provided.

Is this good or bad?

Dr. Singh believes that the impact that this trend will have on consumers and businesses will be fairly limited. However, concentration has not always been positive for clients as banks will have stronger bargaining power if there is less competition in a particular geographical area.

For example, banks could feel less pressure to offer competitive rates or to push promotions down the line if they think there is no need to as clients don’t really have any other place to go.

Overall, the winners of a consolidation in this important sector are more likely to be the banks, not the public.