All banks are under enormous pressure to grow, but amid the economic malaise, the nagging question is: What happens once you do?
Recent remarks by the chief executives of two expansion-minded companies acknowledge the risks of big market share grabs in the current economy.
The CEOs of Toronto-Dominion's U.S. arm, TD Bank, and First Niagara Financial Group Inc. said in interviews that they are bullish on their prospects but ambivalent about the circumstances of their ascent. With good reason, experts said: The downturn that hobbled their rivals could threaten their costly expansions if it lingers too long.
"I have to deliver on market share growth. I would prefer a more high-growth number for the economy. That would be very helpful," Bharat Masrani, TD Bank's CEO, said last week. "In the meantime, the game here is market share. We have been taking share. The macro-market has been slow."
John Koelmel, of First Niagara, also said last week: "We're confident that we can take a bigger slice, albeit of a stagnant pie in the short run. … I'd much rather be competing and winning in a growing, more robust economic environment."
By doing deals and investing in ways to draw new customers, TD Bank and First Niagara are growing while most others aren't. But higher market share isn't a victory per se, experts said. Higher revenue from selling checking accounts and writing more loans is. The big risk these institutions face is spending too much money acquiring customers who don't buy enough products over time to justify the investment, experts said.
Returns will hinge on how well they are managing their growth, and how long it will take for the economy to rebound. Those uncertainties may plague all banks seeking market share.
"The real question is: Is it growing profitability?" asked Brad Smith, managing director and head of research at Stonecap Securities Inc. in Toronto. "And that is obviously going to require a fair amount of time to determine."
Other healthy banks like M&T Bank Corp. and New York Community Bancorp Inc. have been vocal about stealing business from weaker players. But First Niagara and TD Bank have been unusually bold in going about it. They are among the few lenders that have been able to buy nonfailed institutions in the past two years.
Buffalo's First Niagara will have 340 branches in four states once it completes the acquisition of NewAlliance Bancshares in New Haven. TD Bank, of Portland, Maine, has nearly 1,500 branches along the East Coast after closing deals in Florida.
Masrani and Koelmel say they'll have more customers, more products and more chances to increase sales when the economy picks up.
Analysts, for the most part, said they are doing the right thing. With loan losses easing, all banks have to prove they can expand sales right now, they said, or face the ire of shareholders. Taking market share — especially through acquisitions — is the only way to do that right now. They are largely considered well-run banks that know what they are doing.
But experts said they still have some concerns about their big moves. The top one is the economy, which determines demand for loans and services. Koelmel, for one, said it is "increasingly" apparent that there will be a "steep uphill climb" to recovery.
Another worry is how much money these deals will save over time.
Matthew Kelley, an analyst with Sterne Agee & Leach Inc., said cost-savings tend to be lower when a bank does a deal in a region where it doesn't already have a presence.
The projected savings from First Niagara's expansion into Pennsylvania, for instance, weren't has high as some analysts were expecting, he said. "In my view the bar is even higher now for them to do even more deals," he said. "What they need is fill-in transactions."
Collyn Bement Gilbert, managing director of Stifel, Nicolaus & Co. Inc., applauds First Niagara for getting "ahead of the curve" while other banks are still showing an "unbelievable level of apathy" about growing revenue.
But investors will demand measurable gains from the deals. She said two gauges of success may become more relevant until typical barometers like net income normalize. They are: numbers of new accounts and numbers of products sold per household. "When there is not more organic growth, you have to get more accounts and more products [sold] through your legacy business," she said.