Big US Merger Signals Banks Have Put the Financial Crisis Behind Them

Two large regional US banks, BB&T and SunTrust, recently announced a “merger of equals” that will create. America’s sixth-largest bank. The deal is the biggest US bank merger since the height of the global financial crisis,which saw huge distressed sales such as Bank of America’s 2008 acquisition of Merrill Lynch in a $50-billion allstock deal. It is a sign that the US banking industry has emerged from a difficult decade and underscores the growing importance of scale in a business increasingly dominated by a handful of giants.

In early February, North Carolina-based BB&T announced that it will buy Atlanta-based SunTrust in an all-stock transaction that values the combined entity at $66 billion. SunTrust shareholders will receive 1.295 BB&T shares for each SunTrust share they hold, leaving BB&T shareholders with 57 percent of the combined entity and SunTrust shareholders with 43 percent. The deal is priced at a 7 percent premium to the SunTrust share price.

BB&T hopes to combine its community banking and insurance operations with SunTrust’s middle-market corporate banking business and digital consumer lending operations. The two banks estimate that the deal will net them $1.6 billion in annual cost savings by 2022 and will generate an internal rate of return of 18 percent.

For the US banking industry, the deal has been perceived as a healthy sign. During the global financial crisis, a number of financial entities merged under pressure. In 2008, for example, JPMorgan Chase snapped up Bear Sterns and Washington Mutual in distressed sales and Wells Fargo picked up troubled Wachovia. Regulators quickly approved deals that were seen as vital to sustaining the financial system and preventing collapse.

But in the wake of the crisis, deal-making dried up almost entirely. Banks found themselves hamstrung by new regulations and their already-battered balance sheets were not capable of financing major deals. For years, banks’ focus was on recapitalizing and introducing new risk management measures in line with global and domestic rules.

Slowly, however, the environment has changed.

Under President Donald Trump, banking regulations have been scaled back. In 2018, for example, Trump signed a partial repeal of the Dodd-Frank Act. In addition to other changes, the new rules raised the asset threshold at which banks become subject to closer regulatory scrutiny. Under Dodd-Frank, banks with more than $50 billion in assets were deemed too big to fail and subject to additional compliance rules. The repeal raised the threshold to $250 billion, freeing small banks like BB&T and SunTrust, neither of which individually exceeded the threshold, from additional oversight.

In addition to regulatory changes, there have also been fundamental changes in retail banking.

Historically, regional banks were attractive to locals looking for a long-term relationship with a banking team. Today, however, consumers, especially young consumers in urban areas earning higher incomes, are increasingly attracted to large national banks that offer sophisticated digital services. As more and more banking activity takes place online, the local branch appeal of regional banks is waning and they are losing ground in consumer lending and transactional banking.

At the same time, the competitive field is becoming increasingly crowded. Premier investment bank Goldman Sachs,for example, entered the mass retail market in 2016 with its Marcus online lending tool and an instant access GS Bank savings account.

For SunTrust and BB&T, the solution to these competitive challenges is to join forces and leverage economies of scale to allow for greater investment in technology. With a bigger asset pool – the combined entity will have assets estimated at $442 billion – and more customers, the to-be-renamed new bank will have an enhanced ability to take the fight to its national competition.

The renewal of M&A activity in the banking sector is, for many, an encouraging sign. However, some observers note that much of the damage of the financial crisis stemmed from problems in large institutions. As certain banking activities became concentrated in the hands of a small number of global giants, the risks posed by their failure grew, until these entities became too big to fail and taxpayers were forced to bail them out to avoid economic collapse.

If the BB&T/SunTrust deal is just the first of a new wave of consolidation in the US banking industry, concentration risk may once again rise, and post-crisis prudential rules such as Basel III may face a real test.

Intuition Know-How has a number of tutorials that are relevant to mergers and acquisitions:

  • Corporate Valuation – An Introduction
  • Corporate Valuation – Merger Analysis
  • Corporate Finance – An Introduction
  • Mergers & Acquisitions (M&A) – An Introduction
  • Mergers & Acquisitions (M&A) – Analysis • Merger Model Building – Excel Interactive