Breakingviews: U.S. bank merger is step in the right direction

Sometimes ideal partners just need a little nudge to get together. As in romantic comedies, so it goes in regional U.S. banking. First Horizon National and Iberiabank said on Monday that they are merging to create a southern banking powerhouse with $75 billion in assets. The 2018 increase in the threshold for financial institutions to be regarded as systemically important to $250 billion probably gave them the final push. Other U.S banks needing scale may follow suit, but they still need to make sure deals add up.

First Horizon and Iberiabank have long offered an appealing strategic and cultural fit. Avoiding the extra regulation that used to kick in at $50 billion of assets is just one more argument to unite. The market reaction was not spectacular – a less than 4% bump in both firms’ share prices – but it is far more positive than the response to other recent bank-merger announcements, when share prices often fell.

That ought to encourage others. There are over 5,000 financial institutions in the United States tracked by the Federal Deposit Insurance Corporation. Most are far tinier than these two, and in need of greater scale. Yet consolidation has been slow. Even in the bracket between, say, $20 billion and $140 billion in assets, where a merger of near-equals like First Horizon and Iberiabank might now be possible with less red tape, there are 67 lenders, per FDIC’s database.

To please investors, though, they need a good story beyond regulation. The First Horizon-Iberiabank combo will be a leader in a region with projected population growth 25% higher than the national average. The deal will make the new firm a top-25 U.S. player in terms of deposits, giving it scale to compete with the big boys by allowing it to invest more in technology.

And the transaction has modest – but achievable – financial upside. There is little branch overlap, but cost savings of around a tenth of combined expenses, as projected by the companies, should still be worth over $1 billion in present value, more than 10% of their combined market capitalization. The message for rivals is that they need to show not only that mergers won’t trigger expensive regulatory costs, but also that deals have a good chance of creating value.

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