Mergers are good for profits — eventually.
M&T Bank Corp. and Comerica Inc. sought to remind investors of that in reporting hefty merger charges that depressed earnings in the third quarter.
PNC Financial Services Group Inc. also spouted the "mergers-are-good-for-business" mantra while offering a positive update on its pending takeover of Royal Bank of Canada's retail unit. The deal should be immediately accretive because it looks like regulators will not force PNC to issue stock to pay for it, PNC said.
M&T, Comerica and PNC are among the few U.S. banks healthy enough to buy other banks. But each has had to deal with what market watchers have described as the "buyer's curse," a sell-off of shares after they announce a deal on fears that their moves will backfire because the economy is bad.
In discussing earnings on Wednesday, each bank stressed the long-term benefits of an acquisition beyond the costly process of changing signs over branches and paying severances to employees that get laid off. There are new customers to sell multiple products to, and more loans to collect interest from. Still, the most recent quarter illustrated one of the prices of buying: higher expenses. Investors want banks to lower expenses to counter an industry-wide revenue drought.
M&T, of Buffalo, and Comerica, of Dallas, made less money than analysts had hoped because of merger charges.
Though those integration costs were in line with company projections, investors were unforgiving. M&T's shares fell 6% Wednesday, to $72.79. Comerica's shares fell 11%, to $23.13.
Executives at both urged Wall Street to take the long view of their strategic gambles. Comerica said paying $800 million for Sterling gives it a new pipeline for selling business loans and services across southeastern Texas, a relatively healthy region. M&T said Wilmington is a
A merger tends to be "a little noisy and its creates a little bit of confusion" among investors, said Rene Jones, chief financial officer and executive vice president of the $77 billion-asset M&T.
"Wilmington's marriage with M&T is sort of a wonderful thing" because "it allows us to sort of shift our business model," he said.
There have already been benefits: M&T's trust income rose sharply thanks to Wilmington. The addition of its $9.6 billion of loans and securities also helped drive interest income higher. Having converted Wilmington's branches and systems in late August, M&T expects the purchase to start generating cost savings this quarter.
Comerica's merger charge was in line with expectations. It also undercut some of the early benefits acquiring Sterling's roughly $2 billion in loans, most of which are relatively high-yielding business credits. Those loans added $27 million in interest income, sending net interest margin up modestly.
Comerica said Sterling is central to its goal to boost profits by $100 million in 2012 through various cost cuts and revenue generations.
It estimates that Sterling will add $4 million of fee income in 2012 and $200 million in new loans, as Sterling ramps up sales of Comerica's trade finance, merchant services, wealth management and other kinds of products that Sterling lacked. The elimination of redundant staff and system is expected to begin reducing annual expenses by about $56 million by the end of next year.
PNC, of Pittsburgh,
James Rohr, its chairman and chief executive, said "all-in-all we have positive expectations for earnings" next year. PNC is optimistic that its pending $3.45 billion purchase of
The RBC purchase is scheduled to close by the end of the first quarter.
PNC said it expects to eliminate $150 million of RBC's annual expenses next year. It also has to do very little infrastructure investment to be able to sell PNC's wider variety of products and services at RBC's more than 400 branches in six states, Rohr said. It may build about 20 branches in Atlanta, where PNC is in the midst of buying 27 branches from Flagstar Bancorp. Most of the money it will spend on RBC will involve adding bankers and salespeople adept at selling new products.
