The biggest US bank deal since the financial crisis will heap pressure on America’s mid-sized lenders to find merger partners, industry executives, investors and analysts say.
Consolidation among the scores of US regional banks has been long predicted, but financial, regulatory and cultural realities have kept big deals at bay in the decade since the crisis. Thursday’s $66bn “merger of equals” between BB&T of Winston-Salem, North Carolina, and Atlanta-based SunTrust changed the narrative.
“When a deal like this is done it makes everybody who is a mid-sized bank sort of sit back and say, ‘Well, what are we going to do?’” said Bill Harrison, the former JPMorgan Chase chief executive who was instrumental in the flurry of mergers that laid the foundations for that bank to become America’s largest.
The BB&T-SunTrust deal, which valued both banks at their market price on the day it was struck, promises $1.6bn of cost savings by 2022. The banks also claimed that they will be able to innovate faster and compete better in the ever-changing digital banking world, a capability that resonates with peers.
“In discussions with our clients now . . . they view scale as the ability or means by which they can invest and bring their business forward,” said a senior investment banker who advises financial institutions on M&A deals.
Regional bank shares rose in anticipation of action. Shares in Comerica, with $70n in assets, shot up as 5 per cent on Thursday. Huntington, a $110bn bank, rose 4 per cent as did $140bn KeyCorp. Stock prices for larger banks such as JPMorgan and Bank of America did not benefit; regulation effectively rules out mergers between the industry’s handful of national players.
A senior executive at one of the biggest US retail banks said the BB&T-SunTrust combination “changes the market view of minimum efficient scale. You don’t want to be the last remaining player with sub-scale brand, data and technology.”
The deal “will probably accelerate more regionals to pursue deals to improve efficiency ratios and drive scale”, said Chad Borton, president of USAA Federal Savings Bank.
But while there is a clear impetus for other deals, bankers say an exact replica is unlikely.
SunTrust and BB&T were both in a similar position of financial strength, which allowed them to structure a zero-premium deal under which BB&T will buy SunTrust for $28bn in shares. That, in turn, preserved the equity value for shareholders of both companies. On the day the deal was announced, everybody won. SunTrust’s shares closed up 10 per cent and BB&T’s up almost 4 per cent.
“It’s just the math,” says Anton Schutz, a small bank investor at Mendon Capital, pointing out that the deal increases the book value of BB&T shares by 6 per cent, leaving both sets of shareholders better off. By contrast, he said, “When the selling shareholders win and the buyer gets punched in the face, you don’t want to own banks at all.”
Mr Schutz said he thought that other large regional banks such as US Bancorp and PNC, with assets over $200bn, would be looking for deals that are “mathematically attractive” in the same way, and looking over somewhat smaller banks such as Regions, Synovus, KeyCorp or Comerica.
Brian Klock, regional banks analyst at Keefe, Bruyette & Woods, said he thought that larger banks would seek out partners with overlapping regional footprints similar to the ones BB&T and SunTrust share in the mid-Atlantic and Southeast. One example, he said, might be PNC and Citizens banks in the eastern US.
Another factor encouraging bank deals is the promise of lighter regulation in Donald Trump’s Washington.
In October, the Federal Reserve said in a proposed rulemaking that regulations should be “tailored” for banks with between $250bn and $750bn in assets. This would include an easing of liquidity requirements.
When it became clear rising above the $250bn threshold would not mean a drastic increase in regulation, the way was clear for a major deal. This change was particularly relevant for BB&T, which has $225bn in assets.
“If you are already so close to $250bn, why not go over in a big way? You’ll have more scale, and with the ‘tailoring’ proposal your runway for growth goes all the way to $750bn,” said Mr Klock.
Perhaps more important than any particular rule, however, is a change in tone in Washington since the beginning of the Trump administration. In the last two and a half years, “banks have been saying that regulators . . . are much less combative and more co-operative — and this deal is the first tangible sign of that”, according to Stephen Scouten of Sandler O’Neill.
Bankers and analysts emphasised that the cultural barriers to consolidation might be harder to clear than either financial or regulatory ones. It is a cliché in the finance industry that banks are sold, not bought. It is hard to find a management team that is willing to give up their spots in the c-suite without being paid a premium large enough to make a deal unattractive to a buyer.
Rodgin Cohen, an M&A lawyer at Sullivan & Cromwell, said that, in deals billed as mergers of equals, there has to be real equality in the deal terms so that neither side is paying a premium. “That means, by definition, that no one gets everything they want.” This makes such deals hard: “It takes two CEOs who are willing to put their egos aside.”
In the case of the BB&T-SunTrust deal, the two chief executives will take turns leading the combined bank. If all goes according to plan, Kelly King of BB&T, the older of the two, will serve as chairman and chief executive until late 2021, after which the roles will shift to William Rogers of SunTrust. Similarly, the combined bank will not carry the name of either predecessor (a new name has not been chosen yet) and the headquarters will be in the neutral territory of Charlotte, North Carolina.
None of this is easy, and Mr Cohen said that the tie-up will cause “acceleration of thinking about [similar] deals, and accelerate conversations, but whether it leads to actual deals — we will have to see”.
Mr Harrison, who worked on eight bank deals before he retired in 2004, said some chief executives might be discouraged from M&A because of the inevitable difficulties and uncertainties.
“It’s really hard trying to bring all of these different cultures and people together to create a scenario where one plus one is greater than two,” said Mr Harrison, adding that, “If you don’t do that, you shouldn’t have done the merger”.
The prospect of a succession of deals that reduce America’s 4,500-plus banks down to a few hundred is remote. “I don’t think in the post-crisis environment you can be a serial acquirer any more, not with things of size that matter,” said the senior bank adviser.
Mr Harrison said that while the BB&T-SunTrust deal could ultimately pave the way for the creation of a another big national bank, “it would be challenging for them to do another deal for two or three or four more years” given how long it takes to integrate operations.
“It will take some time through the consolidation process with the small- to mid-sized banks to create another big national player,” he said, “but it is the beginning of a process . . . We should have more consolidation.”