BBVA, CIT sales put midsize banks in M&A spotlight

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A pair of recently announced bank mergers has revived discussion about large-scale M&A.

First Citizens BancShares in Raleigh, N.C., agreed last month to buy the $61 billion-asset CIT Group in New York, while PNC Financial Services Group announced on Monday that it plans to acquire the U.S. operations of Spain’s Banco Bilbao Vizcaya Argentaria. BBVA USA has $104 billion in assets.

The size of the sellers is drawing more attention to the roughly three dozen banks with $40 billion to $150 billion in assets, with industry observers wondering if some of those banks will sell or merge with each other as pressure on earnings mounts.

“We feel scarcity value still exists on U.S. franchises with size and superb deposits,” said Chris Marinac, an analyst at Janney Montgomery Scott. “Therefore, further consolidation is still possible.”

“Scale matters more than ever, especially with the growing technology investments needed to keep pace with the biggest banks and fintech start-ups,” said Greg McBride, an analyst at Bankrate. “Banking will continue to consolidate, and it has moved beyond smaller community banks, with larger regional banks engaging in a wave of consolidation.”

Unique circumstances: CIT Chairwoman and CEO Ellen Alemany had hinted for months that she was open to selling. BBVA USA was "a motivated seller," says PNC Chairman and CEO William Demchak.
Unique circumstances: CIT Chairwoman and CEO Ellen Alemany had hinted for months that she was open to selling. BBVA USA was "a motivated seller," says PNC Chairman and CEO William Demchak.

That being said, a wave of consolidation could still be many months away. Banks, for the most part, will need to get a clearer view of the economy and potential credit issues before pursuing large mergers, industry observers said.

“We need to see further emergence of the credit cycle,” said Scott Siefers, an analyst at Piper Sandler.

“It's taken several months for banks to understand how their own balance sheets will likely be impacted,” Siefers added. “As time goes by, I think banks will not only become comfortable with their own cumulative loss potential, but that of some of their peers and/or competitors, as well.”

Some banks in the $40 billion to $150 billion range are still working through their own mergers or are in the midst of cost-cutting efforts.

The $83 billion-asset First Horizon National is integrating its merger with Iberiabank, which closed on July 1. The $50 billion-asset TCF Financial, formed by the 2019 merger with Chemical Financial, is working on an efficiency initiative, with plans to provide more information early next year.

The pending sales of CIT and BBVA USA also have unique characteristics.

CIT should benefit from joining a bank with low-cost deposits to help fund its loan portfolio.

Ellen Alemany, the company’s chairwoman and CEO, hinted a year ago that she was open to a sale.

“This management team has time and time again said that we're always open to opportunities that are going to help accelerate or create more value for the shareholders,” Alemany said during an October 2019 conference call.

The PNC-BBVA deal was spurred by the $462 billion-asset PNC’s sale of its BlackRock stake, which gave it billions of dollars to spend. BBVA also seemed ready to divest a U.S. platform it had been building since it bought two small Texas banks in 2006.

“I think [BBVA] recognized the opportunity they had to work with us,” William Demchak, PNC’s chairman, president and CEO, said during a conference call to discuss the proposed $11.6 billion acquisition.

“This is a long dialogue we've had with them and a long conversation, long due diligence and it worked out,” Demchak added. “So, kind of motivated seller, motivated buyer [with] cash in hand. The right environment led to the deal.”

A 2018 regulatory relief bill that raised the threshold for categorizing banks as systemically important from $50 billion to $250 billion also removed some pressure on midsize banks to pursue acquisitions.

Still, a acquisition could make sense for banks trading at a high price relative to their book value, Marinac said.

But many banks will probably need time to fully assess their long-term positions, as well as those of potential merger partners. While more businesses are expressing optimism about post-pandemic expansion, those improving attitudes have yet to translate into loan demand, Marinac said.

There isn’t enough investor pressure on banks to force deals — for now. That could eventually change, industry observers said.

“Are organizations under pressure to perform post-pandemic? The answer is yes,” Marinac said. “The question is, when does that taxi meter start?”

Paul Davis contributed to this report.

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