Let the bank merger boom begin

• Banks are swimming in so much excess cash that they don't know what to do with it.
• The people at the regulatory agencies have changed so that the foxes are running the hen houses.
• This will lead to the start of a bank merger boom.

American banks are swimming in excess funds. They do not know what to do with this money so they are giving it away in the form of stock buybacks and dividends. At the same, time the irony is that the banks are just starting to report mediocre to disappointing second quarter earnings. So, on one hand, the resources necessary to support meaningful growth are being given away.

On the other hand, the need to use this money to stimulate growth has never been greater. Initial earnings reports for the second quarter suggest that the banks are not obtaining the hoped for margin increases and it is tougher to locate new loans.

The absurdity of this situation is not going to persist. The door to intra-industry acquisitions may be about to crack open. The first inkling of merger mania was seen recently when JPMorgan Chase was reported to be considering buying a payment systems company Worldpay Group in Great Britain.

Under the old political regime this would have been impossible because of regulations and a strict view of antitrust laws. However, the old regime is gone. Now regulatory agencies are, or are about to be run, by leaders who think like bankers and are therefore more willing to accede to bankers requests.

Since the financial crash in 2009, according to FDIC numbers, banks have had common equity to asset ratios of approximately 11.0 percent to 11.3 percent. The last time this ratio was this high was in 1938. Interestingly, for the last four years all of the common equity in the banking industry was invested in cash – pure cash. This has not happened since 1992, 25 years ago.

The first reason banks have so much money is because they are earning record amounts. This was true in 2013, 2015 and 2016.

The second reason that the banks have so much money is because the government has forced them to build much larger equity bases and invest the money raised into cash and securities, most of which are backed by U.S. government guarantees.

So, they have all the cash they can use and they have met all of the government's requirements for holding cash and capital. So, what do they do with the money? Bank managements do not appear to know so they are giving it away. Banks as large as JPMorgan Chase and Citigroup to smaller entities like Regions Financial and Comerica are expected to payout more than 100 percent of their earnings in dividends and stock buybacks in 2018.

What would they like to do with the money? It would appear that banks like BB&T, Citizens Financial, Fifth Third, KeyCorp, M&T Bank, PNC Financial, SunTrust, and even U.S. Bancorp would prefer to make acquisitions. Expect JPMorgan Chase and Bank of America to harbor similar feelings. Some of these banks have said so publicly.

Changes in the structure of the regulatory agencies might make this dream a reality.

• There are two ex-bankers in the Administration:
  • Steve Mnuchin at Treasury
  • Gary Cohn in the Economic Council
• Joseph Otting, a banker, is to lead the Office of the Comptroller of the Currency
• Randal Quarles, an investor in financial institutions at the Carlyle Group, may be the next Fed governor in charge of bank regulation.
• Jay Clayton, a lawyer who advised companies as to how to deal with the Securities and Exchange Commission, is now head of that body.
• Jeff Sessions is the Attorney General
• Jamie Dimon, JPMorgan's CEO, heads the Business Roundtable.

Plus, the need of the United States to grow its banks to facilitate its foreign policy is now an issue. If there are to be non-military sanctions against North Korea, they will start with eliminating that country's access to the global banking system. This requires the U.S. to have big banks; much bigger than they are now.

The need/will among big banks to make acquisitions is there. The money is there. The need for acquisitions to happen on the part of the U.S. government is being changed by international developments. The people at the regulatory agencies have changed so that the foxes are running the hen houses – bankers and their supporters are or will be running the regulatory agencies. All that is needed to start the rush is for someone to ring the bell. That someone is likely to be a new bank acquisition by BB&T. Also consider that JPMorgan Chase may acquire an overseas bank.

The primary targets for acquisitions are mid-sized regional banks with large customer bases and excess deposits. These companies can be absorbed by the bigger banks; their infra-structures eliminated and a wider array of products sold to the customer base. These deals always seem to work well.

Commentary by Richard X. Bove, an equity research analyst at Rafferty Capital Markets and the author of "Guardians of Prosperity: Why America Needs Big Banks" (2013).

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