Magazine article American Banker

Mergers Can't Be Counted on to Boost Efficiency, S&P Says

Magazine article American Banker

Mergers Can't Be Counted on to Boost Efficiency, S&P Says

Article excerpt

Contradicting the conventional wisdom, a new study finds little correlation between mergers and efficiency in the banking industry.

In fact. banks involved in mergers in the past four years have operated less efficiently by some measures than those that stayed out of the merger boom, according to a review of financial data by Standard & Poor's Corp.

The study appears to turn on its head one of the most common assumptions about the industry: that consolidation is necessary to weed out inefficiencies.

S&P bank analyst Tanya Azarchs said part of the reason for the better performance by banks that did not merge is that the group includes banks that were prevented from acquiring by their low profitability.

These banks were forced to rely on their own resources for improvement, and that tended to skew the statistics on efficiency gains in their favor.

More important, however, the study showed revenue dilution at banks that did merge, attributable to the dislocations associated with melding two institutions, Ms. Azarchs said. "Most of the in-market mergers lost revenue momentum and underperformed the industry in years after the merger," Ms. Azarchs said. "Certainly that was the case with BankAmerica" after its 1992 megamerger with Security Pacific Corp.

BankAmerica's efficiency ratio between 1990 and 1994 actually lost ground. Bank of Boston Corp., which was not an active acquirer, improved its efficiency ratio 20.5%.

Chemical Corp.'s merger with Manufacturers Hanover got off to a good start, Ms. …

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