onsider it to be the revenge of J.P. “Jack” Morgan Jr. In 1935, following the passage two years earlier of the landmark Glass-Steagall Act, which mandated the separation of commercial and investment banking, J.P. Morgan & Co. reluctantly spun off its investment banking operation to form what we now know as Morgan Stanley. Jack Morgan’s father, the famed J. Pierpont Morgan Sr., had made the House of Morgan the country’s most powerful bank, helping to birth the likes of U.S. Steel, General Electric, International Harvester and AT&T, and now his son was being forced to dismember it.
Today’s successor to the House of Morgan—JPMorgan Chase & Co.—is still sundered from its Morgan Stanley sibling, but that hasn’t stopped it from becoming a powerhouse in the commercial and investment banking world. In the early history of American finance, commercial and investment banking were seen as two different solutions to the same problem of how to provide investment capital and funding to businesses so they could grow and prosper. The U.S. Congress deemed them to be separate industries after the Great Depression, and later put them back together in 1999 when Glass-Steagall was repealed by the Gramm-Leach-Bliley Act.
In our ranking of the best banks for big business, we considered a variety of factors including commercial and corporate banking revenue, corporate and commercial deposits, total commercial loans, as well as growth in commercial and industrial and commercial real estate loans. Market share was also examined, as well as the opinions of experts.
There is no overlooking this one fact: Each of the top three finishers—JPMorgan, Bank of America Corp. and Citigroup, in that order—bring a combined commercial and investment banking capability to the market that no other U.S. bank can begin to match. And for each of those companies, it is a huge competitive advantage in the market sector where they like to play. “It is to the extent that those largest banks target some of the largest customers out there, like the largest of the Fortune 500 or S&P 500,” says Scott Siefers, a research analyst for Sandler O’Neill + Partners. “If you think about a really massive M&A deal, where bank financing could be part of it, there’s the distribution reach that needs to occur,” adds David Robertson, a managing director at the consulting firm Novantas. “The amount of capital that the top bulge bracket firms can attract and coordinate is impressive.” Whether the assignment is recapitalizing a Fortune 100 company, or hedging a global company’s foreign exchange risk, or financing a large capital project through a combination of loans and bonds, these banks can do it all. The No. 1 ranked bank, JPMorgan, acquired an important piece of its investment banking capability during the financial crisis when it took over Bear Stearns Cos. in 2008 for just $2 a share. The bank runs its commercial and investment banking operations in separate divisions—officially known as Commercial Banking and Corporate and Investment Bank—and together they accounted for 41 percent of the parent company’s revenue and 51 percent of its net income in the third quarter of 2017.
The second ranked bank, Bank of America, assembled its investment banking operation through a series of acquisitions going back to the late 1990s, although its 2008 acquisition of Merrill Lynch & Co. formed the core of its business today. Bank of America divides its commercial and investment banking activities between its Global Banking and Global Markets divisions, and in the third quarter of 2017 those operations combined accounted for 40.7 percent of the parent company’s revenue and 44.8 percent of its net income.
Citigroup, the third ranked bank in the big business category, acquired most of its investment banking franchise in 1998 when it merged with Travelers Corp., which earlier that year had acquired Salomon Brothers. Citi conducts its commercial and investment banking activities (as well as a sizeable private banking operation) in a single division known as the Institutional Clients Group. In the third quarter of 2017, ICG accounted for 50.7 percent of the parent company’s revenue and 73.7 percent of its net income.
Other notable banks in the big business category include Wells Fargo & Co. in fourth place, PNC Financial< Services Group in fifth and U.S. Bancorp in sixth, but these regional institutions are playing a different game than the big three, which are simply in a world of their own.
How They Ranked
|SCORE||CORPORATE/COMMERCIAL DEPOSITS (MILLIONS), YE 2016||CORPORATE/COMMERCIAL BANKING REVENUE (MILLIONS), YE 2016|
|1||JPMorgan Chase & Co.||2.58||$591,966||$42,669|
|2||Bank of America Corp.||3.33||$304,102||$31,330|
|4||Wells Fargo & Co.||4.50||$438,600||$28,542|
|5||PNC Financial Services Group||5.58||$81,611||$5,509|
|7||Capital One Financial Corp.||5.83||$33,866||$2,794|
|9||TD Banks (U.S.)||6.50||$64,900||$2,391|
Did You Know?
ommercial banking is a core business for each of the 10 largest banks in the country, but when the largest competitors in the commercial banking space are also three of the largest banks in the country, with global reach and unrivaled capabilities, what should regional banks do? How should companies like PNC Financial Services Group and BB&T Corp. position themselves against JPMorgan Chase & Co., Bank of America Corp. and Citigroup, which are the 800-pound gorillas in the business of banking corporations?
For starters, the six regionals, as well as Wells Fargo & Co., which is the third largest bank in the U.S. but historically has placed more of its focus on the retail side of the business, have been developing their own investment banking services so they can deliver an integrated commercial banking product to the market, even if their capabilities don’t rival those of the big three.
Dave Robertson, a managing director at the consulting firm Novantas, says that regional banking is in turmoil today because banking is going national. “Banking is becoming a nationally scaled business,” he says. “So if I want to do advisory, transportation or consumer products, I need to be serious about doing deep research and analysis around that. It only makes sense to scale that nationally because the sunk costs of developing that expertise need to be leveraged.”
But of course, regionals don’t have the capacity to compete head-tohead with the likes of JPMorgan Chase or Bank of America all across the board, so they have to pick their spots. One approach for these larger regional banks is to target those companies in their footprint that are large enough to have sophisticated needs that smaller regionals can’t meet, but are still small enough to fly below the radar of the 800-pound gorillas. “There’s always this opportunity to deliver highend< expertise to companies that economically warrant it, but may not be first in the pecking order for the big guys,” says Robertson.
Another common approach is to develop vertical areas of specialization like health care or transportation companies, and pursue that business on a national basis, including targeting out-of-footprint companies. This is exactly what happened in 2015 when Capital One acquired GE Capital Corp.’s health care financing unit. “This is a strategic investment in a specialty industry segment that we have been building out for the past several years,” said Michael Slocum, president of Capital One’s commercial bank, when announcing the deal. “This addition will catapult us to a leading market position in providing financial services to the health care sector.”
According to Scott Siefers, a securities analyst at Sandler O’Neill + Partners, Wells Fargo had also been expanding its capital markets capabilities coming out of the financial crisis. “In fact, they did get bigger in areas like energy,” he says. “But I think at this point, more of their focus is on righting the ship after the account opening scandal than on growing out their product suite more aggressively.”
One regional bank that has done an excellent job of positioning itself against its larger megabank competitors is PNC. “They’ve really had some success with their Harris Williams & Co. [investment banking] subsidiary, which focuses on middle market companies, in a tier that is often outside the focus area of the largest banks, but where a company like PNC can have much more success,” says Siefers.
All of the regional banks understand that a commercial banking strategy built solely around the use of your balance sheet to make loans is two things—a low return-on-equity endeavor because of over-capacity in the commercial banking sector and intense price competition, and a risky endeavor for all the same reasons. “It is a concern for investors,” says Siefers. “Virtually everyone is after whatever growth they can get. So the temptation to undercut yourself on pricing or credit or structure has got to be very real for all of these banks.”
The one time when a strong balance sheet and a willingness to lend money is a real advantage is during a time of economic stress. “We did some research on how companies selected banks after the financial crisis, and the No. 1 factor was the bank’s credit rating and the size of its balance sheet because it was viewed as being too big to fail,” says Robertson. “Right off the bat, that told me that the best thing to be in 2008 was a big bank with a good credit rating,” he says.