By Philip van Doorn, MarketWatch
The announcement of the $66 billion merger of BB&T Corp. and SunTrust could spur a wave of combinations for large regional banks. As banks grow — and they need to grow to increase profits — regulatory costs increase, and mergers can be an effective way to lower expenses.
This the largest U.S. bank combination, by far, since the crisis days of 2008. Investors are already pleased with the deal — and thinking about which lenders could be next.
“The BB&T/SunTrust merger will open more eyes on the potential for more sizable bank M&A to occur,” Jefferies analyst Ken Usdin wrote in a note to clients in the wake of Thursday’s news. “Scale is the game here, as BBT/STI were both eventually going to cross into the $250B-$750B asset bucket.”
BB&Tof Winston-Salem, N.C., and SunTrustof Atlanta announced they would combine in an all-stock merger of equals, although BB&T’s shareholders will own about 57% of the combined holding company. The deal is expected to be completed during the fourth quarter.
Shares of BB&T were up as much as 6% in early trading Thursday, while shares of SunTrust rose as much as 13%. Both have come off their highs in midday trade.
Jefferies’s Usdin called the merger of BB&T and SunTrust “attractive” because earnings per share are expected to increase 13% per BB&T share in 2021 and 9% for SunTrust shares, based on current consensus estimates among analysts.
For large bank holding companies, regulatory scrutiny, including the intricacy of the Federal Reserve’s annual analysis of capital plans and failure contingency resolution plans, increases as they grow, leading to increased staffing and other costs. Another important asset-size threshold for banks is $50 billion. Federally insured depository institutions of that size or greater are required by the FDIC to file resolution plans, colloquially known as living wills.
BB&T was the 10th largest U.S. bank holding company as of Dec. 31, with $226 billion in assets, while SunTrust was the 11th largest, with $216 billion in assets. The combined company, whose name hasn’t been determined, would be the nation’s sixth largest, based on those figures. It will be based in Winston-Salem and be among the top three lenders by deposit market share in Florida, Georgia, North Carolina, South Carolina, Tennessee, Maryland, Virginia and West Virginia.
A similar deal was announced by TCF Financial /zigman2/quotes/202459217/composite TCF -4.65% of Wayzata, Minn. ($23.7 billion in assets), and Chemical Financialof Midland, Mich. ($21.5 billion in assets), on Jan. 27.
“With the Chemical/TCF deal last week, the market was thinking this may work,” KBW analyst Brian Klock said during a phone interview Thursday morning. “A lot of other banks in the range of $100 to $200 billion asset size may be thinking about this. This is the right thing to do, when you think about competing with the bigger banks that are putting so much investment into technology. If the franchises work well together, there are a lot of arguments in favor of deals like this.
Klock had a neutral rating on BB&T but an “outperform” rating for SunTrust before the deal eas announced.
We can’t predict which banks will merge, and one comforting reason is that banks aren’t in a crisis environment. Loan quality across the domestic industry remains very strong. But the regulatory burden has increased in the postcrisis environment, and the Federal Reserve’s recent change in policy curtails the continual rise in interest rates that was expected to fatten lending margins.
So it may be worthwhile to look at the large regional banks that have shown the lowest returns on equity in recent years. These banks arguably face greater pressures to merge and enjoy “cost synergies” similar to the ones that BB&T and SunTrust expect.