While the merger of US regional mid-sized banks BB&T and SunTrust resulted in an entity of impressive scale and profitability – and received a positive reaction from the markets – it remains to be seen whether similar sized US banks will be rushing to emulate the deal. Jane Monahan reports.

US M&A

The BB&T and SunTrust merger in February was the first big US bank deal since the industry’s merger frenzy at the height of the financial crisis. While some have been tempted to interpret this as reigniting a trend, there are several factors to consider.

The deal, presented as a merger of equals (MOE) valuing the combined entity at $66bn, unlike the more usual bigger bank/smaller bank acquisitions, is also the second MOE between regional mid-sized banks announced in 2019, after the merger of Michigan’s Chemical Bank and Minnesota-based TCF Financial Corporation.

Both of these MOEs set an example. In the handful of regional bank mergers since the financial crisis, the acquirer’s stock invariably traded sharply down after the announcement. Notably, Fifth Third Bank’s $4.7bn bid for MB Financial – 2018’s biggest bank deal – was met with scepticism by investors anxious about a merger at the height of an economic and credit cycle. By contrast, the two all-share, low-to-no-premium MOE transactions in 2019 have been well received by investors, and stock reactions in all four banks' part of the deals were positive.

“Bankers are seeing that [BB&T/SunTrust] is a deal that the markets actually support and the stocks are doing well. I think that’s what’s driving a lot of the increased focus on US bank MOE and M&A momentum,” says Catherine Mealor, a specialist in smaller regional banks at New York-based financial analyst Keefe, Bruyette & Woods (KBW).

Action picks up

Vinnie Badinehal, head of US financial institutions at RBC Capital Markets, says that compared with the first two months of 2018, “hands down, 2019 has been a significantly busier merger and acquisition [M&A] year, from a size and overall volume of deals perspective”. In terms of scale and profitability, the BB&T/SunTrust deal is hard to beat.

The combined bank, with $442bn in assets, will be the country's sixth biggest commercial bank. It will also be one of a select group of US ‘super regionals’, which include US Bancorp, Capital One Financial Corporation and PNC Financial Services, according to the Federal Reserve. On top of that, the new bank will have a 22% return on tangible equity, according to BB&T and SunTrust – a profitability ratio higher than any of the country’s biggest US lenders.

Furthermore, the deal was helped by share price dynamics that may not be easily replicated. BB&T’s stock was trading at a higher multiple of its tangible book value than SunTrust’s – the former at twice its tangible book value, the latter between one and one-and-a-half times that measure. “So the dynamics of that worked, when the buyer had a better, stronger book-value multiple; what we call the currency of the buyer’s stock,” says Brian Klock, KBW’s expert in larger regional banks.

The price is right

Having that pricing gap, and getting it right, is a factor that can encourage a mid-sized bank or a super regional to take over a competitor, while the lack of such valuation has the opposite effect.

An example here is Huntington Bankshares (HBAN), based in Columbus, Ohio, which has about $109bn in assets and a profitability ratio among the best in the industry. HBAN chief financial officer Mac McCullough said at a financial institutions conference sponsored by RBC Capital Markets in New York in mid-March: “We just don’t believe that the valuations are attractive, when you think about core banking franchises and bringing an acquisition together.” 

John Turner, chief executive of Regions Financial Corporation based in Alabama, which has $126bn in assets and markets spanning southern and midwestern states, declared at his own bank’s February 27 ‘Investor Day’ conference: “By continuing to improve our business, we will be in a better position to take advantage of an acquisition opportunity if it came along. If we strengthen our currency then we might have some opportunities.”

Acquisitions may not be top of regional banks’ agenda for other reasons. For instance, Regions Financial and Utah-based Zions Bank, a smaller regional bank, say they are not interested in bank M&A because they are still focused on internal cost-saving or efficiency programmes, and they are also re-investing in their core systems.

After unveiling a 2018 to 2021 strategy plan that includes branch cutting, cost saving and technology investment for the front and back offices, in February, Mr Turner said: “Anything that distracts from executing that plan, we think, would be a mistake. M&A is very disruptive.”

M&A fatigue

At the RBC investors conference in March, Curt Farmer, president of Dallas-based Comerica Bank – seemingly reacting to investor pressure – said: “I’m tired of talking about M&A.” The lender has about $71bn in assets and a footprint in key California markets and in Texas. “It’s an open discussion but not a priority. There would have to be a compelling reason: shoring up capabilities, overlapping markets,” Mr Farmer added.

Moreover, in Austin and San Antonio in Texas and California’s Bay Area, where Comerica believes it has a higher growth potential than its south-western and midwestern markets, “targets are pretty limited and multiples are fairly high”, he said. “Mergers are difficult to pull off. We’ve only done two in 20 years.”

The BB&T/SunTrust deal is also the first big US regional bank merger where the potential for larger scale-related technology investment, and mitigating regulatory/compliance cost synergies, were cited as benefits, according to a recent KBW report titled ‘Will big-bank mergers make a comeback?’.  

Kelly King, CEO and chairman of BB&T, noted in his RBC conference presentation that the deal with SunTrust “will be very transformative in terms of moving the business forward in a technological era”. Specifically, he said, the combined bank would set up a technology and innovation centre at its new headquarters in Charlotte, North Carolina, and with a higher technology budget it will be better able to compete with the country’s biggest national banks.

Questions of scale

KBW’s Mr Klock believes that having more scale in technology to compete with the larger universal banks only applies to certain products and businesses.  “Consumer products are really the most commoditised. Residential mortgage products, credit cards, auto loans: digitising that sort of a product, that’s where scale matters,” he says. “But in the case of commercial loans and commercial real estate loans, those are really relationship-type credits. It is hard to drive that with an algorithm. You have to know your commercial customer.”

Financial analysts believe it is in wholesale banking where a merger can really have value. “There’s a deposit presence, a market share presence, a business presence, the business leaders there, those commercial companies and businesses. When you acquire that, you are acquiring that relationship in the market and that market,” says one financial analyst.

BB&T and SunTrust have said that, as a result of their deal, the combined bank will have a top three market share in eight of the 10 fastest growing US states.

Believe the hype?

Although the mammoth merger may not signal a trend, talk of US bank consolidation is not just hype. Changes to the 2010 Dodd-Frank Act (which aimed to reduce risk at the largest, most systemic US institutions) that were put through by president Donald Trump’s administration have made large bank mergers easier. The Fed has raised the threshold for the size of acquisitions that it presumes will not “raise material financial stability concerns”, such as significantly increasing interconectedness, complexity, cross-border activities or other risks. 

Additionally, legislation passed in Congress in May 2018 established a tiered approach to capital and liquidity requirements for banks with assets of more than $50bn, with banks in the $100bn to $250bn asset range getting the biggest benefits. They are exempt from liquidity coverage ratio and net stable funding capital ratio requirements, and will only have to do quantitative comprehensive capital analysis and review (CCAR) stress tests every two years. Even banks with assets of between $250bn and $750bn, while still subject to full-blown CCAR and annual stress tests, have had their capital and liquidity requirements reduced.

Financial analysts and commentators believe these changes will be positive for large bank M&A in the future.

Cutting costs

The BB&T/SunTrust deal also highlighted the more traditional M&A cost-saving benefits. The two banks, which now have a combined total of more than 3100 branches, with some 740 of them within three kilometres of each other, had already started closing outlets as customers switched to digital services. While in the past when US banks pursued mergers to expand their branch networks, in the new technology era many are preferring to cut back on them.

KBW’s report notes that Bill Demchak, CEO of Pittsburgh-based PNC Financial, a highly diversified super-regional bank with about $380bn in assets, has said in the past that it is extremely unlikely PNC would buy a traditional bank, as the returns for bank deals are not as high as from those obtained by setting up a new player and investing in digital channels. Nevertheless, financial analysts think PNC may still pursue bank acquisitions in certain markets, to increase market share or to guard against a competitor grabbing a bigger share of the market.

Meanwhile, often the hardest issue in a deal is finding compatibility and integrating the merging banks’ cultures. In BB&T’s case, Mr King, aged 69, is due to retire and has already announced his intention to pass the CEO position to SunTrust’s William Rogers following the merger in September 2021.

The two banks are also both south-eastern institutions with large consumer banking operations. They have both grown by buying smaller banks, though no regional bank can beat BB&T’s record under Mr King of 19 bank mergers since 2000. They are also conservatively managed. Neither played a major role in the financial crisis (though SunTrust had some mortgage-related issues), nor did they stoke 'too big to fail' concerns.

Disruption equals opportunity

Financial analysts and bankers anticipate, as in most big bank mergers, that there will be disruption. The BB&T/SunTrust merger could create opportunities, especially for other banks in the south-east to take market share and talent. In particular, there are expected to be gaps in Atlanta, where SunTrust has deep business and cultural connections and where its headquarters are due to be closed.

Other regional mid-sized banks may be eyeing such opportunities but takeovers may not be their chosen strategy, despite the excess capital that many of them enjoy. M&T Bank, a $120bn-asset bank based in Buffalo, New York that has a footprint stretching through New Jersey to Washington DC and Virginia, has pursued a strategy of growth by acquisition for some time. But chief financial officer Darren King said at the RBC conference: “We have never thought: ‘We have excess capital therefore we should buy another bank.’ If we have excess capital, we pay back shareholders.”

Financial analysts and bankers do consider MOE deals such as the BB&T/SunTrust merger particularly challenging. It is very difficult to get all the pieces to fit: the cost of the transaction, similarities in size and business markets, some level of cost saving and increased market share. And, on top of that, corporate cultures and leadership and organisational changes need to be worked out.

Still, KBW’s Mr Klock guesses there could be “one, two or three” large regional bank deals this year. However, he says that, like during the 2000s when consolidation was dominated by small bank sales, there are likely to be more opportunities for smaller banks with $50bn or less in assets. Such banks are also under more pressure to keep up with technology, forcing them to seek scale.

Analysts argue that because of a potentially more challenging economic environment, banks running out of steam on organic growth may be under increasing pressure from shareholders to consider consolidation to add scale. On the other hand, fears of a potential downturn would chill any acquisition plans, as HBAN’s Mr McCullough noted at the RBC conference, saying: “The fact that we are at the tail end of a long cycle, we are not sure we [would] want to be integrating something of size as we move into a downturn.”

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