The sheer scale of U.S. Bancorp's planned purchase of MUFG Union Bank NA could attract regulatory scrutiny amid a political landscape that appears to be growing hostile to large bank deals.
With a $7.97 billion deal value at announcement on Sept. 21, the transaction marks the largest bank deal this year, according to S&P Global Market Intelligence data. MUFG Union, a subsidiary of Japan's Mitsubishi UFJ Financial Group Inc., has a sizeable presence in California. The deal, if approved, will push U.S. Bancorp to be the No. 5 bank by deposit market share in the state, up from its current position of No. 10. That increased market share and scale should provide revenue synergies and additional brand-name recognition. But its size could also trigger regulatory scrutiny, especially considering President Joe Biden's executive order to review the approval process for bank deals.
There are other potential complications to closing the deal. The Office of the Comptroller of the Currency recently issued a consent order to MUFG Union Bank relating to alleged deficiencies in the company's technology and operational risk management. And the OCC's leadership is currently in flux, with President Biden's nominee, Saule Omarova, expected to face a tough confirmation process. Further, Federal Reserve Gov. Lael Brainard said in May that "it might be helpful to undertake a broader review" of the Fed's framework for deals.
"I'm sure no bank is eager to be first out of the gate with a transaction that might be denied," said Jeremy Kress, assistant professor of business law at the University of Michigan, pointing to the uncertainties surrounding both Biden's executive order and regulatory leadership.
Asked about the regulatory approval process, a U.S. Bancorp spokesperson referred questions to management commentary on the deal call.
"We believe strongly that our technology capabilities as well as our compliance framework actually helps address the issues that are itemized in the consent order and address them more quickly," said Chairman, President and CEO Andy Cecere on the deal call.
An MUFG Union Bank spokesperson referred regulatory questions to U.S. Bancorp and declined to comment on the consent order.
A couple of deals already appear to be in regulatory purgatory. First Citizens BancShares Inc. and CIT Group Inc. recently extended their merger agreement as they continue to wait for approval from the Federal Reserve. The banks announced the deal in October 2020 and expected to close in the first half of this year. Now, management teams have extended the deadline to March 2022, and some analysts suspect an unfavorable political climate is playing a role. And Green Dot Corp. disclosed on Oct. 5 that it was unable to secure the Fed's approval for its deal to buy certain assets from a bank.
In U.S. Bancorp's deal, MUFG Union Bank's customers will be transferred to U.S. Bancorp's platform, which could address the regulatory concerns, said Scott Siefers, an analyst for Piper Sandler & Co. who covers the company. At the same time, Siefers called the consent order a "wild card," adding that analysts generally prefer acquisition targets come with a "clean bill of health."
Synergies and uncertainties
On the upside, the deal, if approved, would more than double U.S. Bancorp's deposits in the state of California. Siefers said that will help the bank "round out its franchise in some nice markets." The bank highlighted that after the deal it will have a top-three market share in San Diego, Sacramento and Santa Maria, as well as a top-five ranking in Los Angeles. In addition, Union Bank was underinvested relative to U.S. Bancorp, Siefers said.
"To the extent that USB's got the opportunity to sort of bring up that Union Bank franchise to become ideally on par with U.S. Bancorp, there's a lot of revenue opportunity in there as well over a period of time," Siefers said in an interview.
In addition to revenue synergies from MUFG Union's legacy customers, the deal will give U.S. Bancorp significantly more scale. Greater scale should allow the bank to invest more into technology to keep up with the multitude of fintech startups, wrote Todd Baker, a senior fellow at Columbia University and the managing principal of Broadmoor Consulting LLC, in an email.
"The ultimate goal for all large banks is to be in a position to survive the digital transition into whatever the next financial services model looks like. A national footprint will be critical as marketing prowess and branding, along with technology, will be critical differentiators," Baker wrote.
Scale was top of mind for U.S. Bancorp, with Cecere saying the deal came "at a time when scale is as important as it's ever been for the industry."
For a bank the size of U.S. Bancorp — the company reported $558.89 billion in total assets in the second quarter — a deal that adds meaningful scale would need to be large. Essentially, what makes the deal most attractive for U.S. Bancorp is the same trait that could invite regulatory scrutiny.
Baker said the regulatory purgatory for other large deals could be related to the Fed's upcoming leadership transition.
Mayra Rodriguez Valladares, managing principal at MRV Associates LLC, also said U.S. Bancorp's deal could suffer from poor timing as the Fed works through a set of "higher priorities," such as its review of ethics rules and upcoming leadership changes with Vice Chair for Supervision Randal Quarles' term ending in October.
"I'm not even sure it's going to happen next year, much less [this] month," Rodriguez Valladares said.