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Bigger is...well...bigger. Two Major Banks Doing What Banks Do.

Today, the Electoral College meets to confirm former Vice President Joe Biden's promotion to official President-Elect. The system has been working over time, just as it has been worked over time. It hasn't bowed, it hasn't broken. Some even say that despite (because of?) wholesale changes to voting rules and access, it may have been the safest election "ever." We will leave that to the lawyers and to the historians.

If that weren't enough, the day has finally arrived when deliveries and injections of Covid vaccines begin in earnest. There will be no shortage of politicians in photo opportunities with the most vulnerable and the most exposed to this horrible virus who are the priority. Some speculate that the US could vaccinate upwards of 100 million people by mid-late spring. Nonetheless, it will be a long tense winter, days and nights filled with anguish and hope side by side as we navigate the many troubling aspects of this pandemic.

But we can't just sit back and wait for politicians and science to determine our fates, life moves ahead at breakneck speed. In the financial services sector, this means another big merger, as Huntington Bancshares and TCF Financial agreed to combine and create a top 10 US bank, following on the heels of other major bank mergers and acquisitions in the past year. So much for a global health crisis slowing down the forces of M&A in the US and around the world.

Deal terms seems very reasonable, and outcomes forecasted by management promise to elevate financial metrics to leadership amongst the legacy American banks (which we distinguish from rising FinTech competitors all around the world and all over the internet).

But deal terms aside, these transactions HAVE TO HAPPEN. And they will continue to happen in earnest. In fact, look at the dense but still narrow footprint of Huntington "NewCo," it feels safe to say this won't be their last deal. Analyst ratings and evaluations aside, the legacy banking industry in the US has been consolidating for a generation and developments and demands of technology are ACCELERANTS to this progression. As we look ahead, 2021 should be very busy for Bank M&A.

And now a word about value creation. This transaction will stand out for density and cost saves. However, the presentation slides do little to suggest a change in cyclicality or diminished revenue challenges. This is important. Management indicated the potential for revenue synergies, but did not include them in their financial modeling. That means they are very low probability opportunities of aggregate significance.

"It's a great opportunity to drive scale (management comment)." Almost every transaction that is announced in the banking industry offers this promise. Table stakes, nothing more. But experience shows us that all banks at every size continue to fight challenges to scale. There are just too many players nibbling at the shiny apple of still-robust bank operating margins. The business is being picked apart relentlessly across the chain of value as once-specialties become genericized.

But these banks have to try, and we are rooting for them and their investors. Forward is the only direction that makes any sense. But remember this: the banking industry, over time, has not shown that bigger is better.

The industry has proven that bigger is...well... bigger.


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