Chase more deals or sit out of the M&A game for a while?
That's the tough question that banks CEOs faced during fourth-quarter earnings calls after making sizable acquisitions. Executives at KeyCorp in Cleveland and F.N.B. Corp. in Pittsburgh said they are more interested in organic growth than doing deals for the foreseeable future.
That decision makes sense given pressures to ensure that large transactions are integrated smoothly, experts said.
"You have to digest the people, processes and the customers," said Terry McEvoy, an analyst at Stephens. "You have to integrate the cultures and the products. It's very much consistent with what you see in the industry."
But executives at BB&T in Winston-Salem, N.C., and M&T Bank in Buffalo, N.Y., — two companies where their most recent deals are further in the rearview mirror — indicated they were closer to getting back into the dealmaking game but gave a number of caveats.
"Acquisitions … have always been an important component of our growth strategy," said Darren King, the chief financial officer at M&T Bank, though he acknowledged it was still digesting its most recent acquisition.
Staying on the sidelines
The $136.5 billion-asset KeyCorp made its largest acquisition ever last year when it bought the $39 billion-asset First Niagara Financial Group. The deal was met with skepticism as some investors and analysts balked at the price and tangible-book-value dilution. However, more recent forecasts for surpassing cost-cutting targets has led to cautious optimism about the deal.
Still, management is not looking to land another big acquisition anytime soon.
"I think it's very clear that our first…priority [is] to complete First Niagara and realize the value that we have committed to the Street and for our shareholders," Beth Mooney, KeyCorp's chairman and CEO, said Thursday during a conference call with analysts. "And as we went into this transaction a year ago, we had said for a very long time that … we lacked for nothing that we needed to be successful, and we have a strong business model to generate organic growth in long-term performance."
Instead, the company will look to organic growth to add share in some of its new markets, such as Pittsburgh and Philadelphia, that it has entered through the First Niagara deal, said Don Kimble, KeyCorp's CFO.
KeyCorp is hoping to gain about $300 million in additional revenue. Executives hope to extend products, such as cards, payments, corporate treasuries and capital markets, to First Niagara's customers.
There are also opportunities for KeyCorp to capitalize on business lines it entered through First Niagara. For instance, KeyCorp had previously worked with auto dealers on floor-planning arrangements but hadn't been in the indirect auto lending business. But the $3 billion indirect auto portfolio from First Niagara is creating an opportunity for KeyCorp to deepen existing customer relationships and stimulate growth, Mooney said.
The acquisition also accelerated KeyCorp's return to the first mortgage business. The company had announced in 2015 that it would rebuild its residential mortgage platform, but First Niagara already had a mortgage operation and now KeyCorp can capitalize on that.
"We think that with our products and capabilities, we can move market share," Kimble added during the conference call. "We are excited about the possibility of doing that and really not looking for acquisition strategies to fill in the gap."
This strategy makes sense given pressure from both regulators and shareholders to ensure that banks can perform once a large acquisition closes, analysts said. There seems to be an unwritten rule right now from regulators that they want to see how a bank operates for a year after completing a sizable transaction, said Gerard Cassidy, an analyst at RBC Capital Markets. And regardless of that, KeyCorp's "plate is full," he added.
"There is no need to look elsewhere," Cassidy said. "This is a huge deal for them. They have to get it absolutely right. There is still plenty of juice left in this transaction."
Executives at F.N.B. also said they would focus on organic growth once it completes its deal to buy the $7.3 billion-asset Yadkin Financial in Raleigh, N.C. That would be a change of pace for F.N.B., which has completed nine bank deals since the start of 2008.
Instead, the $21.4 billion-asset F.N.B. will focus on metro areas where it will have a top 10 deposit share and has opportunities to gain customers without more deals, Vince Delie, president and CEO, said during a conference call on Thursday with analysts.
"We have achieved the scale that we need to compete effectively," Delie said. "We've made significant investments in our infrastructure and in our product set. We are ready to go."
It's likely that F.N.B. will eventually get back into acquisitions, but that probably won't occur until 2018, said Casey Haire, an analyst at Jefferies. That would give the company enough time to ensure that the deal has been integrated smoothly.
"They are going to take their time to make sure they keep their clients and Yadkin employees happy," Haire said. "They want to make sure everyone is on board before they go after another deal."
Contemplating more deals
BB&T has been one of the few large financial institutions to complete acquisitions in recent years. The $217.4 billion-asset company is currently taking a break from M&A. But even when BB&T returns to dealmaking, Chairman and CEO Kelly King will steer clear of any potential target if it's saddled with too many branches.
"I'm doing a lot of thinking just in terms of the proper value of buying institutions that have a lot of branches," Kelly King said during a conference call Thursday. "There's a chance that we are facing a near-term tipping point with regard to the value of branches as the digital technologies really accelerate and reduce the interactions in the branches."
Banks will still keep branches as various customer groups still visit retail branches, he said. For example, small businesses frequent branches because they need to make large cash deposits. But if BB&T is kicking the tires on a potential acquisition, a bank with a large number of inefficiently run branches will probably fetch a lower multiple.
BB&T would be especially cautious in acquiring an out-of-market bank with a large branch network, Kelly King said.
"There's no synergy in terms of overlap until you get all of your profit improvement from the [back office]," he said.
Kelly King noted that BB&T's existing enforcement action related to Bank Secrecy Act compliance does not prevent the company from making deals.
"We're not inherently precluded from acquisitions during the BSA period, certainly with regard to insurance and other types of acquisitions," he said.
M&T Bank is another large financial institution that has been able to complete an acquisition since the financial crisis. But its deal for Hudson City Bancorp took more than three years to complete as both companies dealt with compliance issues.
Still, the experience hasn't soured the $130.5 billion-asset M&T on more deals. Management is interested only in buying companies within its current geographic territory or contiguous to it, Darren King, M&T's CFO, said during a conference call. That strategy works best since it allows M&T to leverage its brand in a way that something distant does not.
"We'd like to be back in the game, but we've got to finish off our work" related to an enforcement order tied to BSA compliance, Darren King said.
M&T would only re-enter the M&A game if prices dropped from their current levels, Darren King said. The company has only acquired banks in the past when the asking price was reasonable, and that won't change.
"When we've been more aggressive … more active is when things have gone a little bit bad," Darren King said.