2020 – the year of mergers of large banks

UNITED STATES (OBSERVATORY NEWS) — Recently, one can increasingly hear forecasts of the flow of large mergers of US banks. However, the facts often suggest otherwise. So far, small banks are merging: transactions worth more than several billion dollars are difficult to implement.

Nevertheless, everything is ready for 2020 to become more productive in terms of transactions, as falling profits and presidential elections draw attention to about 4,700 banks across the country. In February, two southern banks, BB&T and SunTrust, decided to create a Trust bank with assets of $ 460 billion.

This is nothing compared to four megabanks: assets of JPMorgan Chase, Bank of America and Citigroup reach at least $ 2 trillion, Wells Fargo assets are something like that. But thanks to this transaction, Truist is in the top ten and proves that large transactions can be concluded in the post-crisis period in accordance with the rules of regulators, friendly to the banks appointed by Donald Trump.

As important as the size of the deal with Truist was its structure. The nominee buyer, BB&T, paid in shares with no premium. This “merger of equals” allowed the two groups of shareholders to share their savings over time, instead of getting the pound of meat from the target bank’s investors from the very beginning.

This is key because shareholders hate it when a bank they own pays a premium to a competitor. Two deals in 2018, which included premiums – Fifth Third / MB and Synovus / Florida Community, led to the immediate collapse of the shares of both buyers. Paying now for the revenue growth that will happen tomorrow is simply not fashionable.

Truist gives hope that the largest regional banks will follow the trend of a lack of premiums, creating banks that can challenge the giants.

The dominance of the Big Four is a real threat to competition. The multibillion-dollar technical budgets of the largest players mean that they can improve mobile banking tools and underwriting systems, smaller banks simply can not be compared. One of the evidence is the fact that the largest banks in recent years have recorded an increase in deposits in the United States.

The flow may change if such American banks as Bancorp of Minneapolis (assets for $ 488 billion), M&T from Buffalo or Birmingham ($ 126 billion), Regions Bank of Alabama ($ 128 billion), enter into significant transactions.

However, such transactions are not easy to conclude, said Rodgin Cohen of Sullivan & Cromwell, a lawyer specializing in bank mergers and acquisitions.

“We need CEOs who trust each other. You should be able to negotiate on non-financial issues, the most important of which is the question of who will be the new CEO,” he said.

Two recent mid-size, no-premium deals have given rise to hope. The mergers of IberiaBank / First Horizon and Texas Capital / Independent led to the creation of banks with assets of $ 75 billion and $ 48 billion, respectively, with headquarters in Memphis and McKinney, Texas. When the deals were announced, stocks of buyers and sellers rose sharply.

Banks that review each transaction may also experience some temporary pressure. The likelihood that in January 2021 a democrat may take control of the White House and not have a clear idea of ​​banking transactions, makes many analysts say that the window of opportunity will close next spring. Cohen points out that even if Trump wins again, staff changes can occur at the Fed or other regulatory bodies, which could complicate the deal.

Marty Mosby, a banking analyst at Vining Sparks, believes that politics is not as important as the fact that low interest rates continue to reduce bank margins and the benefits of cost reduction programs disappear. Result: in 2020, profits may go down.

Brian Klock of KBW agrees. Next year, a Boston analyst expects earnings growth per share of 2% and notes that most of this is due to the repurchase of shares and the benefits of transactions already concluded.

“Without this, there would have been no EPS growth,” he said.

Are slowdowns in profits, a tough political calendar, and the recent success of non-premium deals enough for more major mergers? Ultimately, it all comes down to Cohen’s opinion of the CEOs. There is a belief in the industry that banks are sold, not bought. It’s good for bosses: interesting work, big salary, prestige. Making a deal with a low premium requires someone to give it all up.

In general, the economy for 2020 is set for bank mergers.


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