Midwest Banks Make a Splash in Finance

U.S. Bancorp, a Minneapolis-based bank, is making a significant strategic move by acquiring BTIG, a smaller investment bank backed by Goldman Sachs, for up to $1 billion. This acquisition is part of a broader trend where Midwest regional banks are expanding their presence in the investment banking sector.

A Strategic Shift

U.S. Bancorp is no stranger to the investment banking arena. They previously sold their brokerage arm, Piper Jaffray, in 2003. Since then, they have diligently built up their capital markets business, generating approximately $1.4 billion annually from this sector, which accounts for about 14% of their non-interest income. With the addition of BTIG, they expect to bring in an additional $750 million in fees, closing the gap with competitors like PNC and Truist, who derive around 18% to 19% of their non-interest income from similar activities.

The Midwest Invasion of Wall Street

The trend isn't limited to U.S. Bancorp. Other regional banks such as PNC and Truist are also making significant strides. These banks are not only competing with industry giants like Goldman Sachs and JPMorgan but are also capturing a substantial share of their business. For instance, independent shops like Evercore and PJT Partners saw their share of the mergers and acquisitions (M&A) fee pool grow from 19% in 2008 to 41% by last year.

Growth Amidst Competition

Traditional lenders like Wells Fargo have also seen a notable increase in their share of the investment banking fee pool. At the turn of the century, they held about 9% of the $28 billion fee pool. By the end of 2023, this number had surged to 23% of the $68 billion fee pool. Over the same period, the five big U.S. financial shops lost 16 percentage points.

Investor Skepticism

Despite this growth, investors remain unconvinced. U.S. Bancorp, PNC, and Truist all trade at lower multiples of expected book value compared to two decades ago. In contrast, JPMorgan's valuation has nearly doubled, highlighting the disparity in investor confidence.

The Heating Competition

The rivalry between Main Street and Wall Street is intensifying. Regional banks like U.S. Bancorp typically advise local banking customers on smaller deals and capital needs, often not competing directly with big players like Bank of America and Citigroup. However, as Main Street grows bigger and busier, the likelihood of collisions with Wall Street increases.