MorganOne Has Little Local Impact

February 2, 2004
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GRAND RAPIDS — J.P. Morgan Chase & Co.’s proposed acquisition of Bank One Corp. would create the second largest banking franchise in the United States, a combined enterprise with assets of $1.1 trillion and some 2,300 branches. 

But the mammoth size of the merged bank doesn’t appear to frighten anyone around here. 

It’s simply another in what has become a long line of mega-combination banks, said Michael Moran, chief of capital markets for Capitol Bancorp Inc., a bank development company headquartered in Lansing.

“The track record on these large transactions historically has been average to deplorable in terms of executing on the integration plans,” he said.

“It often translates into tremendous opportunities for regional banks and community banks and other large banks to capitalize on the inevitable turmoil and dislocation these large mergers create.”

Too, he said large bank consolidations sometimes raise the threshold with regard to lending activity, redefining small business or middle market lending.

“If that, in fact, is the case again, it’ll create opportunities at the smaller end of the scale for the community banks and regional banks to pick up business that no longer meets the threshold of a now trillion dollar enterprise.”

Moran highlighted what he said are two important points about the transaction.

First, it will be the first large transaction Bank One has been involved in since Jamie Dimon took the helm about four years ago.

“Dimon has an admirable track record in regard to integrating acquisitions. I think that will be a key difference here,” Moran said.

Second, the two banks’ franchises have really limited physical or geographical overlap, with the exception of Texas.  

“I think those two things will help limit or mitigate the usual pains and such that occur in these transactions.”

The entities bring two very distinct strengths to the table, Moran added.

J.P. Morgan is a leader in the wealth management business. On the other hand, he pointed out that through its prior acquisitions, Bank One has a very strong retail component and commercial lending.

Will the merger heat up lending competition in the West Michigan market?

Moran said the environment is already intensely competitive, so the merger probably won’t alter that dynamic much.

“I think it will just shift competition within different strata, depending upon loan size and business focus and such.”

Edmond Olejniczak, a financial advisor covering banks for Bloomfield Hills-based McQueen Financial Advisors, thinks that in terms of lending, the most impact the merger will have is that it might drive away the few remaining mid-sized customers at Bank One.

As he sees it, the merger is really a story of diversification and the importance of the branch system.

J.P. Morgan doesn’t have a brick-and-mortar presence in Michigan, he said, but with the merger would automatically acquire 242 branches in this state alone.  

J.P. Morgan gains that traditional banking foothold in Michigan, while Bank One gains access to all the capital markets and alternative financing sources, as well as to wealth management services — all of which are highly attractive to large commercial borrowers, Olejniczak explained.

“You now have a big bank focused on big customers that just got bigger. That’s how the big banks benefit.”

What it means for community banks in West Michigan, he said, is a renewed opportunity to focus on the needs of small- and mid-sized commercial borrowers and smaller customers in general that weren’t being serviced completely by the big bank. 

Olejniczak advises community banks to focus on their strength — the small- to mid-sized customers — and to look at the Morgan Chase-Bank One merger as a lesson in diversification.

He said the reality of the marketplace is that the big guys are diversifying.

“The big banks are recognizing the importance of having branches and of having the sources of funds to finance everything else that they do.

“Maybe if you’re too focused as a community bank on one area, like commercial lending, think of ways to further fully serve your community,” he recommended. 

Gregg Dimkoff, a professor of finance at Grand Valley State University, said that in terms of products and services, banks always say they’ll be able to broaden their customer offerings through merger.

“It’s hard to believe that anything we would need here in Grand Rapids was not already available from Bank One or another large bank. I think Bank One was big enough to loan to any business in Grand Rapids.

“We don’t have anybody here that wants to borrow a trillion dollars. So I think the impact of the merger might be minimal.”

As far as Dimkoff is concerned, what drives mega mergers is the “bigger is better” mentality.

“I think it’s partly an ego thing, too. In banking, if you’re talking big, you’re talking more and more money.”

Usually when banks merge, the overlapping jobs are in corporate marketing and central accounting, but Grand Rapids hasn’t been either a marketing or accounting center for Bank One, he pointed out.

“I think we’re safe on jobs. I think a bigger impact would be if anything at all goes wrong in the transition, which often happens.

“If your account gets messed up during the integration of their information systems, you’re probably going to leave.” 

In fact, Dimkoff recalled lunching recently with a couple of local bankers who were “overcome with glee” at the prospect of the merger generating some fall-out — and “another round” of potential new customers for competing banks in the area.

Mergers have been going on for more than 20 years and only slowed down because the recent recession drove down stock prices, Dimkoff observed.

Consolidation has reduced the number of banks in the United States to half of what it was 20 years ago. 

In 1984, the top 10 banks controlled about 29 percent of the assets in the banking sector, Capital Bancorp’s Moran pointed out. Today the top 10 control more than 60 percent.

Though there has been a real shift of power to the larger players, Moran stressed that the community banks and regional banks across the country — the ones that execute on their business plan — have been very profitable and very successful.

“I think there will always be a role for those organizations,” he said.

Olejniczak anticipates more mergers and acquisitions ahead, including among smaller banks that want to pool their synergies to gain new lines of business and attract new markets.

“The cycle of the American banking system is such that banks get so big that something happens — either someone falters or talented people leave the bank to start their own banks,” Olejniczak explained.  

“You have mergers and you have de novos that start as the result of mergers. I see that cycle continuing on.”

Dimkoff has no doubt that mega-combination banks are the future, but he can’t foresee the United States as becoming home to just one or two megabanks exclusively, as is the case in some European countries.

“I don’t think it will truly ever happen like in Europe because there are too many people here who like the small neighborhood banks. There will always be little community banks popping up,” he predicted.

The $58 million, stock-for-stock Morgan Chase-Bank One transaction remains subject to the approval of the shareholders of both financial institutions, as well as federal and state regulators.

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