Big U.S. Bank Merger Means Big Smiles All Around
(Bloomberg Opinion) -- Abandoning the world’s biggest economy isn’t an easy move for any ambitious company executive. But Banco Bilbao Vizcaya Argentaria SA’s retreat from North America — it’s selling the bulk of its commercial lending business there to PNC Financial Services Group Inc. — will give the Spanish bank the chance to reboot after years of languishing by looking closer to home. The deal will also reshape the domestic U.S. banking industry.
PNC will pay $11.6 billion in cash in a deal that will create America’s largest regional bank. The transaction will bolster the U.S. company’s presence in the south of the country, and Texas in particular.
The regional lender had funds available after freeing up $14 billion in May by selling its holding in BlackRock Inc. Finding scale is crucial in an industry that needs to invest in technology and where the behemoths of JPMorgan Chase & Co. and Bank of America Corp. continue to expand. Even after this deal, PNC’s $564 billion in assets will be dwarfed by the top U.S. banks’ balance sheets.
The takeover will add 21% to PNC’s earnings from 2022 and it will be able to cut costs at the new entity. The U.S. bank didn’t pay through the nose, either, because of its ability to use cash. The price is a 34% premium to BBVA USA’s tangible book value; the 50 banks tracked by the KBW Regional Banking Index trade at an average premium of 40%.
But BBVA also looks like a winner from what its chairman, Carlos Torres, described as “a no brainer” of a deal. The all-cash sale will inject funds into BBVA that represent about half of its market value before the transaction was announced.
Before the announcement, BBVA’s stock price was at a low not seen since the mid-1990s. The shares are worth about one-fifth of their value back in 2007, when the company bought the U.S. activities (then known as Compass Bancshares) as part of a global expansion. Since then, BBVA has suffered from the financial crisis, a Spanish real-estate bust, an expansion in Turkey and now the pandemic.
Armed with cash that valued the U.S. assets at almost 20 times their earnings, Torres wants to reinvest the funds to compensate investors for the dilution from the sale, which will see the bank lose about 10% of its current profits.
One choice — should regulators allow it — would be a share buyback. BBVA, hampered for years by low capital buffers, will see its common equity Tier 1 ratio jump from 11.5% to 14.5% after the sale. That’s higher than the average of the top European banks, giving it an ample cushion for an investor payout.
But strategic options may be more compelling in the longer run. After exiting the U.S., much of BBVA’s business will be in emerging markets. In addition to its 49.9% stake in Turkiye Garanti Bankasi, it owns the biggest bank in Mexico. It could look to expand in other complementary markets.
With deeper pockets, buying a domestic Spanish rival such as Banco de Sabadell SA might also be possible. BBVA and Sabadell late on Monday said they’re exploring a combination. Pressure on lending income from low interest rates is forcing European bankers to find ways to cut costs. The loan losses from the pandemic slump will add to the urgency.
BBVA is giving European bank investors hope that even without cross-border deals there are ways for lenders to help themselves. Its shares jumped more than 25% after the PNC deal’s announcement. Giving up on yesteryear’s goals is a good start.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Elisa Martinuzzi is a Bloomberg Opinion columnist covering finance. She is a former managing editor for European finance at Bloomberg News.
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