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After Morgan Stanley-E*TRADE deal, GSIBs talk 'aggressive,' 'transformative' M&A

At a deal value of about $13 billion, Morgan Stanley's pending takeover of E*TRADE Financial Corp. is by far the largest acquisition by a global systemically important bank in the U.S. since the financial crisis-era deals that created the group in their current form.

Before the deal for E*TRADE, there were just four purchases by the eight U.S. GSIBs valued at more than $500 million since 2013, amid ongoing concerns about too-big-to-fail institutions and regulations inhibiting their growth.

Those regulatory constraints are still in place. International rules on large, complex banks provide for progressively tougher capital requirements as the companies grow in size and complexity. For acquisitions of depositories, federal law bars deals that would give the combined entity more than a 10% share of national deposits, ruling out purchases by Bank of America Corp., since it is already above the threshold. JPMorgan Chase & Co. and Wells Fargo & Co. are within half a percentage point of that line, according to data from S&P Global Market Intelligence. Wells Fargo, moreover, is subject to a consent order stemming from its consumer abuse scandals that caps its assets to their level at year-end 2017.

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Market volatility, weakened acquisition currencies and recession fears driven by the new coronavirus may inhibit M&A activity over the near term, but other GSIBs have articulated growing interest in deals recently. "We are looking and we'll be much more aggressive on acquisitions across the board," JPMorgan Chase Chairman and CEO Jamie Dimon said at the bank's investor day on Feb. 25. Mary Callahan Erdoes, JPMorgan Chase's CEO of asset and wealth management, outlined a particular focus on potential purchases in asset and wealth management.

The E*TRADE deal will make the $895.43 billion-asset Morgan Stanley bigger by more than $50 billion of assets, but executives framed the transaction as a way to advance the Wall Street firm's evolution away from volatile capital markets businesses toward steadier streams of income. With the discount brokerage boosting revenue without adding much credit or market risk, Morgan Stanley believes the merger will help increase its capacity to return capital to shareholders under annual regulatory stress tests.

Dimon, citing the E*TRADE deal, said that the "door is open for people to be a little more ambitious and aggressive in how they deploy capital with acquisitions." He described a shift in the supervisory environment, saying that "now there's a little bit more of a green light."

Top regulators have said repeatedly that capital levels are about right, clearing the way for massive share repurchase plans after stress tests in recent years.

Goldman Sachs Group Inc., which acquired United Capital Financial Advisers LLC for $750 million in 2019, remains on the prowl for deals, "including things that could potentially be transformative," Chairman and CEO David Solomon said at a conference on Feb. 27.

"If we find things that we think can advance our strategy like United Capital did, we'll do it," Solomon added. Goldman bought United Capital to extend its wealth management business, which focused on ultra-high net worth clients, to the mass affluent market. Still, Solomon cautioned, "the bar to do those things is extremely high, and it's not easy."

Morgan Stanley also remains interested in additional acquisitions, though it is focused on "smaller opportunities" in asset management for the time being, CFO Jonathan Pruzan said at a conference on Feb. 27. He said that the bank is not interested in adding to its institutional securities business with acquisitions, and that its wealth management team will be tied up by the integration of E*TRADE.

In terms of how JPMorgan Chase will approach M&A, Dimon said his bank "should be very, very creative," citing its 2019 purchase of the health care payments company InstaMed Communications LLC for $500 million as an example. Dimon expressed an interest in "adjacent" capabilities — layering new products and services onto existing offerings, and cultivating specific customer segments. He praised Square Inc.'s success in merchant processing for restaurants and other constituencies.

Even though buying another bank in the U.S. is not likely for JPMorgan Chase, the company said it has added over 90 branches in 16 new markets since 2018, using data from its card business on where customers are spending their money to decide where to expand.

Broadly, the bank's next acquisition "could be anything," Dimon said. "We're going to be pretty open-minded. And the parameters will be, we think it makes us a better, stronger company."