Acquisitive banks should review their cross-sale and incentive policies – along with those of any potential targets – in the wake of the Wells Fargo phony account scandal.
Regulators are already putting consumer compliance under the microscope, forcing banks such as
"Bank M&A has been ugly for several years now and I'm sure this [the Wells scandal] doesn't help," said Harvard Winters, a former investment banker who conducts equity research on banks. "There are bigger things preventing M&A than this and this is just icing on the cake."
Many banks have incentives programs for customer service representatives and tellers, and most are well-run with no issues, said Rick Childs, a partner at Crowe Horwath. Heightened scrutiny should encourage banks to pay more attention to policies as they conduct due diligence on a potential merger partner.
"When you do risk assessment, it is an area I would look at," Childs said. "How widespread is the program? How aggressive? How many new accounts are being opened up? There will continue to be cross-selling programs out there."
Wintrust Financial in Rosemont, Ill., will adjust its due diligence to make sure it doesn't inherent any problems from a seller, said President and Chief Executive Ed Wehmer. The $25 billion-asset company, which always looks into a seller's loan-production incentives, will add a review of any compensation tied to deposit accounts, he said.
"You have to spend more time on due diligence given the minefield in compliance," Wehmer said. "If the seller has an issue, then it [falls on] you. It's like getting a cancer transplant. You have to be very careful."
A number of banks are altering their due diligence because of the Wells debacle, said Greyson Tuck, a lawyer at Gerrish McCreary Smith.
Some financial institutions, for added measure, are altering parts of merger contracts. A typical agreement, for instance, includes a clause stating that each bank has no knowledge of activities that violate regulations. Based on the "magnitude of this issue," more buyers will likely want to expand that close to address account openings, Tuck said.
Management teams should spend more time preparing to field questions from analysts and investors about topics such as cross-selling and account openings. At the same time, certain words and phrases should be avoided.
"I think banks will avoid terms like cross selling, though the smartest among them were already doing that," said Robert Hockett, a professor at Cornell Law School. "We'll continue to see consolidation among banks. They want to offer a wider range of services but also to reach more markets and operate more widely."
It is unclear if the Wells scandal will influence how regulators review pending mergers, industry experts said. There are already indications that regulators are reaching out to the biggest banks for more information about sale practices, said Rolland Johannsen, a senior consulting associate at Capital Performance Group.
Banks that apply for merger approval already have to submit financial projections for the combined company. It is possible that regulators will scrutinize any deal that proposes a significant increase in fee income, and banks that plan to present those types of numbers must have a suitable explanation ready to go, Tuck said.
The potential impact on acquisitions by bigger banks is also uncertain. Regionals such as BB&T, Huntington Bancshares and KeyCorp have completed deals recently without notable regulatory delays, providing hope that others could follow. The recent news about Wells, however, has again cast the banking industry in a negative light, while resurrecting the debate about whether some banks are too big to manage.
Any increase in regulatory scrutiny could also ensnare deals between smaller institutions.
"Larger banks don't have a monopoly on scandal, customer abuse or questionable practices," Hockett said.
The Office of the Comptroller of the Currency, the Federal Deposit Insurance Corp. and the Federal Reserve Board did not comment.
Still, Maryann Hunter, deputy director for the Fed's division of banking supervision and regulation, said during a bank M&A conference in September that the agency examines any tied to consumer compliance and cross-selling practices during the approval process.
"This is a good time for everyone to make sure they know where they stand," said Hunter, who wasn't discussing any specific institution. "I don't think anyone would be surprised if there is closer regulatory attention to cross-selling practices."
