Bank M&A Skeptics Cool on BB&T-SunTrust Stirring Deal Frenzy
(Bloomberg) -- A rally in regional bank shares, prompted by Thursday’s biggest bank deal since the financial crisis, may not last, several analysts say. Some are questioning the prospects for future deals, and highlight the one-off nature of the planned combination of SunTrust Banks Inc. and BB&T Corp.
Bank stocks fell Friday in mid-day trading, with regional lenders including SVB Financial Group, Huntington Bancshares Inc., Comerica Inc. and PNC Financial Services among top decliners. Huntington, Comerica and PNC have triggered speculation about future deals. Declining 10-year Treasury yields, as traders and pundits talk about a “Powell put,” and concerns about global growth and trade are also likely weighing on share prices.
The BB&T-SunTrust deal “sparked optimism that we could see a pickup in M&A activity,” Nomura Instinet’s Bill Carcache wrote in a note, “but we believe three unique aspects of the deal set a high bar.” Those include a fixed stock exchange ratio with a relatively low premium; accretion to tangible book value, and the “classic in-market nature” of the combination, since nearly a quarter of BB&T and SunTrust’s branches are within two miles of each other.
“Future deals with big take-out premiums that enable sellers to exit without skin in the game are unlikely to be as well received,” Carcache said.
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Other skeptics voiced similar doubts that BB&T and SunTrust would quickly revive the bank merger market. “This deal may put pressure on peers to replicate and build scale, but it may be difficult due to footprints and a lack of desire to give up control,” Macquarie’s David Konrad wrote.
And at least one brokerage downgraded SunTrust to market perform. Bernstein’s John McDonald wrote that, “we like the deal, but take a wait and see approach at current valuation.” Still, he applauded the sound “strategic rationale for the deal,” and “the shareholder-friendly economics.”
While double-upgrading BB&T, to buy from underperform, Bank of America Corp.’s Erika Najarian also flagged the unique aspects that may mean the deal isn’t a model for others.
Not only do both banks “truly complement each other,” but they also “recognized that traditional premium deals weren’t working,” with “too big of a premium for too small of an impact,” she wrote. Unlike similarly-sized super-regional banks, such as U.S. Bancorp and PNC Financial Services Group, the new bank “would have a dominant, contiguous, and concentrated presence down the Mid-Atlantic coast and into the most vibrant parts of the Southeast.”
Beyond Wall Street, Democrats in Congress expressed their concern about the deal, with Sen. Elizabeth Warren (D-Mass.) writing a letter to Federal Reserve Board Chairman Jerome Powell, saying “The Board’s record of summarily approving mergers raises doubts about whether it will serve as a meaningful check on this consolidation that creates a new too big to fail bank and has the potential to hurt consumers.”
Rep. Maxine Waters (D-Calif.) called for “serious scrutiny” of the deal “from banking regulators, Congress and the public to determine its impact and whether it would create a public benefit for consumers.”
Even so, there are others who’re looking for more bank deals to emerge.
“This deal confirms our belief that the U.S. banking market is going to consolidate into around a half dozen national banking franchises,” Vining Sparks’s Marty Mosby wrote. Other possible combinations include PNC and Regions Financial Corp., U.S. Bancorp and Comerica, or M&T Bank Corp. and Citizens Financial Group. He expects the “remaining banks larger than $50 billion will likely be forced into finding strategic partners” to afford needed technology investment.
BB&T shares dropped as much as 1.6 percent and SunTrust shares fell as much as 1.4 percent.
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