• Log in

Thicken My Wallet

Everything to do with thickening your wallet

• Home

Are Bigger Banks Neccessarily Better for Shareholders?

Posted by admin on June 12, 2007 in Uncategorized

We may be entering into the age of the international mega-bank. The Royal Bank of Scotland (the world’s 7th largest bank in 2005 according to the Economist) is one of three banks who have made a formal bid to purchase ABN Amro (the world’s 13th biggest bank by assets in 2005). The world’s largest bank, Mitsubishi UFJ, was only created earlier this year through the merger of two banks. But is all this bank merger activity necessarily good for shareholders? Do mega bank stocks perform better post-merger or will shareholders end up with bank stocks that go nowhere?

There seems to be research which indicate that shareholders in mega banks may not be fairing so well post-merger. The Board of Governors of the U.S. Federal Reserve studied bank merger activity from 1980-1993 and found, no matter what methodology used, banks did not achieve greater profitability or efficiency post-merger. However, shareholders of the acquired firm were more likely to gain than shareholders of the acquired firm. Looking only at short term stock prices, the study found that, in general, a merger between banks did NOT improve the resulting bank’s economic performance. This study should be read judiciously though- the study is looking at old data and it only tracks the short term stock performance of the merged bank.

Another study in a 2005 issue of The Financial Review (an academic journal) looked at the performance of banking holding companies from 1987-1998 and found similar results- to quote the summary of the paper: “market reaction to the merger announcement is significantly negative.” (emphasis is my own). In other words, bank stocks did not fair too well post-merger. I have only read the summary and I am still trying to track the entire article down.

Finally, there’s been growing market unrest over Citibank- one of the world’s largest banks (see here for an example). Many people think its simply too big and unwieldy (on the other hand, the same linked article suggests that Citibank may be under-valued now). Although these are just general trends, it seems that, in the short term at least, mega banks don’t result in increased stock performance for you and me. This is not surprising given that as a general rule conglomerates generally trade at a discount.

Some food for thought the next time we complain that the quickest way for our bank stocks to increase is to buy a large rival. I am trying to find a PWC study which I believe said most merged companies, regardless of industry, fair poorly post-merger. If anyone remembers this study, please email me. Thanks.