Predictions that a rush of big US bank mergers is just around the corner are perennially popular, but the facts rarely co-operate. While small community banks continue to link up, deals worth more than a few billion dollars are hard to get done.
That said, the pieces do seem to be in place to make 2020 a busy year for deals, as falling profits and the presidential election sharpen minds at the 4,700 or so banks across the country.
The stage has been set this year by a series of tie-ups, which began with a really big one. Two southern banks, BB&T and SunTrust, hooked up in February to create a bank called Truist (TFC), with $460bn in assets.
That is still small compared with the four mega banks: JPMorgan Chase (JPM), Bank of America (BAC) and Citigroup (C) all have at least $2tn in assets, while Wells Fargo (WFC) is there or thereabouts. But the deal puts Truist in the top 10 and proves that good-sized deals can get done post-crisis, at least under the bank-friendly regulators appointed by Donald Trump.
Just as important as the size of the Truist deal was its structure. The nominal buyer, BB&T, paid in shares at almost no premium. This “merger of equals” allowed the two sets of shareholders to split the cost savings over time, rather than having the target bank’s investors extract their pound of flesh at the outset.
This is key, because shareholders hate it when a bank they own pays a premium for a rival. Two deals in 2018 that included meaty premiums — Fifth Third/MB and Synovus/Florida Community — resulted in the shares of both buyers taking an immediate beating. Paying now for earnings growth tomorrow is just not in vogue. So Truist raises hopes that the biggest regional banks might follow the no-premium trend, creating banks with the heft to challenge the giants.
Consumers should hope they do. The dominance of the big four is a real threat to competition. The multibillion-dollar tech budgets of the biggest players mean they are able to improve their mobile banking tools and their underwriting systems in ways smaller banks simply cannot match. The fact that the biggest banks have captured the majority of US deposit growth in recent years is just one piece of evidence. The tide might be turned if the likes of US Bancorp of Minneapolis ($488bn in assets), M&T of Buffalo ($126bn) or Birmingham, Alabama’s Regions Bank ($128bn) do meaningful deals.
Yet transactions like this are not easy to pull off, said Rodgin Cohen of Sullivan & Cromwell, a lawyer who specialises in bank M&A. “You need CEOs that get along and trust each other,” he said. “You have to be able to negotiate the non-financial issues — the most important of which is who will be the new CEO.”
Two recent midsized, no-premium deals have held out reasons for hope. The IberiaBank/First Horizon and Texas Capital/Independent mergers created banks with $75bn and $48bn, respectively, to be headquartered in Memphis and McKinney, Texas. The shares of both the buyers and the sellers got a bump-up when the deals were announced.
Banks that are considering a deal could be feeling some time pressure, too. The prospect that a Democrat could take control of the White House in January 2021, and might take a dim view of bank deals, has many analysts talking about a window of opportunity that will close in the spring of next year — given such deals can take seven months or more to close. Mr Cohen points out that even if Mr Trump wins again, there might be personnel changes at the Federal Reserve or the other regulatory agencies, which could make deals harder.
Marty Mosby, banks analyst at Vining Sparks, thinks that the politics may be less important than the fact that low interest rates continue to squeeze bank margins and the benefits of cost-cutting programmes are beginning to fade. The result is that in 2020, earnings could be flat to down. “It will feel kind of late-cycle,” he said, adding that this “gets people thinking strategically”.
Brian Klock of KBW agrees. The Boston-based analyst is looking for earnings-per-share growth of about 2 per cent for the industry next year, and notes that most of that is driven by share repurchases and the cost benefit of the deals that have already been done. “Without those, we’d have no EPS growth at all,” he said.
Are slowing profits, a tight political calendar, and the recent success of no-premium deals enough to spur major mergers? It comes down, in the end, to Mr Cohen’s point about chief executives. The old saying in the industry is that banks are sold, not bought. Bosses have it pretty good: an interesting job, a big pay cheque, prestige. Doing a low-premium deal requires somebody to give all that up.
In sum, the economics are lined up for a big 2020 for bank mergers. The psychology remains to be seen.
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