Bank Bill to Bring More Competition, M&A

As expected, President Donald Trump signed regulatory relief for banks into law on May 24. Because the legislation needed the support of both Republicans and Democrats, a middle ground was needed, so the bill made only moderate changes to existing regulations, most notably leaving the Consumer Financial Protection Bureau alone. Overall, the benefits from regulatory relief fit well within our previous projections, and we are not making any material changes to our fair value estimates for the companies we cover.

One of the primary benefits we see of a less stringent regulatory environment will be the ability to shed excess capital and increase leverage. For the traditional banks we cover, over the next five years we project an increase in leverage of roughly 5% on average (as measured by equity/assets) and an increase in returns on equity of more than 20%, with roughly one fourth of this increase coming from the rising leverage. We do not plan to make any changes to our economic moat ratings based on the passing of this bill, as we believe that over the longer term, the economic benefits of the law will be shared and competed away to some degree, and the gains we currently project are already accounted for in our current ratings.

The legislation was aimed at benefiting primarily smaller banks, but we see two key benefits for the larger banks as well.

First, the trust banks, and potentially even the larger banks with trust operations (

Second, the bill raises the threshold to be designated a systemically important financial institution from $50 billion to $250 billion in assets. For banks with $50 billion-$100 billion in assets, this relief would be immediate (under our coverage:

We would not be surprised to see more deals like the recently announced acquisition of MB Financial by Fifth Third, in which a midsize regional bank acquires a smaller player to gain scale in key markets and move up the superregional size ladder. Given the recent increases in overall bank valuations, we do not expect these deals to come at bargain prices in the current environment. The largest banks are already so large that either they are explicitly forbidden from further banking acquisitions, or one that would move the needle significantly would probably not be approved. Instead, we see these banks (mainly the big four plus