U.S. lending by big banks has seen a shift as they are now embracing clients they once viewed as small. This is bad news for smaller lenders, as this client segment has always been their turf. Some of the drivers of this strategic shift include changed corporate deposit choices and an epic battle with an altered interest rate environment.
Why the Shift?
This reset in the banking environment started as smaller companies ran to safer havens with their deposits in the spring of 2023, reacting to a near-miss banking crisis. Regional banks watched as their once captive clients migrated to large institutions for safety. These new accounts then began to serve the big banks’ other needs as well.
Meanwhile, the big players that once were only content with jumbo-sized deals found there’s a pretty penny to be made with smaller business loans. The result is that big banks are now going head-to-head with lenders that once specialized in a certain size range, and they’re winning. Worse yet, being active now on smaller deals is seen as a stepping stone to winning years of larger business as companies grow.
Defining Small
JPMorgan Chase (NYSE:JPM), known for its work on mega mergers, is a prime example of this trend. They are dedicating resources to deals involving companies valued at $2 billion or less. The goal is to leverage their existing relationships with roughly 30,000 businesses that now use JPMorgan’s commercial banking services. This presents expanded opportunities to offer profitable investment-banking products like loans, IPO assistance, or M&A advisory if needed.
M&A Pipeline
Midsize companies are particularly attractive due to their lower sensitivity to rising interest rates compared to large corporate deals. Additionally, private-equity firms heavily target this segment, as demonstrated by a record 74% of private-equity buyouts in 2023 being midsize deals. The competition is often an easy win for the mega-lenders, and the trend has remained strong as fundraising for mid-market buyouts has been robust, demonstrating ongoing private investor interest.
JPMorgan has swooped in with their experience and ability to capitalize on opportunity. While their overall M&A revenue dipped in 2023, their dedicated middle-market M&A unit saw a significant 48% increase in revenue. This success has led to an expansion of their Mid-Cap Investment Banking unit, with plans to grow from 115 bankers to 150 in key markets like Dallas, Nashville, and Phoenix.
Another big bank tapping into this good fortune is Bank of America (NYSE:BAC). For example, Bank of America, which also operates a large commercial bank, has doubled its number of middle-market investment bankers over the past two years, reaching a total of 200.
Who Is Hurt from Banking Change
The fallout from the deposit shift has not been kind to regional banks. Many have been forced to scale back their lending operations as they grapple with a smaller customer base and the impact of higher interest rates.
Specialized small investment banking boutiques that fight for an allocation in a deal are now competing with more resourceful giants. In the past, there was no concern as their prospects could not get the attention of mega firms. Now, with deposit accounts at these large institutions, their phones are ringing with potential financing opportunities.
Key Takeaway
Big banks are increasingly focusing on small and midsize companies, leveraging existing relationships and expanding into new territories. This strategic shift allows them to outcompete the specialized boutiques and maintain long-term client relationships. Investors should note the growing importance of middle-market deals in big banks’ revenue streams.
