Charlie Perer
Co-Founder and Head of Originations
SG Credit Partners

“Enemy at the Gates” is classic war movie from 2001 starring Jude Law and Ed Harris. The movie, which is set during World War II, is about two snipers playing a dangerous game of cat and mouse, with Law’s character, Vasily, outmatched by the more experienced Erwin König (Harris). The key tenet of the movie is underdog Vasily has the homefield advantage and defeats König to help Russia defend its territory.

Right now, the nation’s largest banks, aka the “super power banks,” are the enemy at the gate of the big regional banks. The super power banks continue to use their scale to take share and are not afraid to win by outpricing the regional competition. Regional banks are by far outmatched by assets but have the regional homefield advantage and loyalty of many customers. The recent M&T and People’s Bank announcement clearly illustrates what regional banks are doing to compete in their respective territories to keep the super powers behind the gates.

To compete, regionals have been transforming into super regionals (defined as having at least $50 billion in assets) to better compete against the super powers in their respective territories. Let’s just quickly summarize some recent comps to prove the point:

  • M&T and Peoples
  • PNC and BBVA
  • BB&T and Sun Trust (i.e., Truist)
  • Fifth Third and MB
  • Huntington and Chemical/TCF
  • First Citizens and CIT
  • RBC and City National
  • CIBC and Private Bank

To avoid doubt, this is not a complete list and just meant for illustrative purposes. These deals were largely geographically focused, with the goal of building regional super powers. Homefield advantage against the banking super powers only goes so far if you can’t achieve enough scale and products to compete. The many byproducts of these mergers include more products and services, but one of the most important is the expanded asset-based lending presence afforded to these banks to better compete against the super powers.

Banking has changed at every level, but to be a successful super regional, several critical changes must be made, including, but not limited to, the need to provide:

  • A platform of products that serve both the business and its owner.
  • Technology capabilities that range from business to consumer.
  • ABL capabilities to compete nationally and the necessary collateral monitoring capabilities to serve the broader commercial banking footprint.

The capex required for technology alone is in the billions and the super powers have already made this investment out of necessity, which has paid off in spades from treasury management to consumer banking. To be a super regional, a bank needs the scale to afford the capex and the customer base to take a platform approach, which includes ABL, as not all regional banks provide this product type. ABL, while still small compared with consumer banking, is becoming a case of the dog catching the bus in the sense that it is becoming a vital part of any sizeable bank’s platform, which could not be said 20 years ago. Put frankly, ABL was less of a consideration in years past than it is today, as senior management now finds itself with scalable specialty finance businesses with capital markets capabilities.

Each of the aforementioned bank mergers has a strong ABL presence, which historically was not part of the strategy of regional bank expansion. In fact, the majority of bank mergers mentioned have sizeable ABL groups with national reach while the rest of the bank only competes within its respective region.  It’s a testament to how far the ABL industry has come and shows that executive teams at regional banks better understand how ABL fits into building a super regional bank. It’s a very hard function to build, but you simply can’t compete without having it. These ABL groups are what keep marginal clients around and what lets the bank onboard clients not yet ready for commercial banking. The ABL groups are at the gates every day competing against bigger, national banks in their territories. The majority of these banks understand how to use their region to their advantage, which is a necessity since the competition at all levels is fierce and no sizeable deal is won without competition.

The success and competitive forces of the super powers created the need to create super regionals and set off hand-to-hand combat for clients in many regions of the country. The super regionals know who is at their gates and they are ready for action.