Banks have offered countless ways they aim to spend their savings from the federal tax cut — but M&A isn't on the list.

There had been some speculation that decreasing the corporate tax rate could arm buyers with more buying power to sweeten their offers to prospective sellers. But regional bank executives in earnings calls this week have shown little interest in picking up the pace of bank acquisitions as they lean toward digesting what they already bought, pursuing smaller, nonbank deals and rewarding shareholders.

Beth Mooney, chairman and CEO at KeyCorp, indicated the Cleveland company’s M&A strategy would remain unchanged. With the exception of buying First Niagara Financial Group in 2016, Key has focused on purchasing specialized businesses such as Cain Brothers, an investment banking firm focused on the healthcare sector.

“There is indeed no change in our 2018 plans per the level of investment, and I think we'll invest as opportunities are appropriate that are consistent with our business model and also are consistent with our stated goal of continuing to drive positive operating leverage,” Mooney said Thursday in response to a question about how Key would use its tax savings in the long term.

From left: Darren King, CEO of M&T Bank Corp.; Beth Mooney, CEO of KeyCorp; and Kelly King, CEO of BB&T.
Status quo
M&T could pursue whole-bank or branch deals, but the current market is “fairly quiet,” CFO Darren King (left) says; KeyCorp sees “no change in our 2018 plans” for investments, CEO Beth Mooney says; BB&T is “still right in the middle” of integrating previous deals, CEO Kelly King says. Bloomberg News (Mooney)

To be sure, there are some banks that are considering acquisitions in part because of tax reform. Executives at Comerica in Dallas said during their fourth-quarter earnings call on Tuesday that they were mainly looking at deals within their footprint after being asked about the impacts of tax reform, regulatory relief and M&A.

But it makes sense that regional bank executives are largely considering other uses for the additional earnings expected from a lower tax rate, said Marty Mosby, an analyst at Vining Sparks. He noted that the boost to earnings could even encourage some potential sellers to be more optimistic about their futures, causing them to hold out and try to remain independent.

“Savings from the tax rate doesn’t get diverted in that direction,” Mosby said. “One-third will be reinvested and not make it to the bottom line. The remaining two-thirds will increase after-tax income which will be split evenly between increased dividends and incremental share repurchases.”

Lightening the regulatory burden could drive more whole-bank M&A than tax reform, said R. Scott Siefers, an analyst at Sandler O’Neill. Increasing the $50 billion-asset threshold for systemically important financial institutions could ease deals for some midsize buyers and sellers.

“It’s not clear to me that the tax law change in of itself will be a driver of M&A, except that it allows for some certainty,” Siefers said.

There was very little chatter about bank M&A during BB&T’s conference call as Chairman and CEO Kelly King spent some time managing expectations about his team’s ability to make the most out of the Pennsylvania markets it entered with the August 2015 purchase of Susquehanna Bancshares and subsequent acquisition of National Penn Bancshares. Management is also looking to exit a consent order tied to Bank Secrecy Act compliance.

“There was still a drag in 2017,” King said of BB&T’s $30 billion-asset operation in the Keystone State. “They’re great long-term investments, but … it takes about two years — two and a half years — to go through the restructuring process. We were still right in the middle of that.”

It seems as if BB&T could look at acquiring technology companies. Earlier this week, it announced it had earmarked $50 million to invest in or acquire emerging financial technology firms. BB&T could seek a competitive advantage by improving the customer experience and lowering operating costs.

Another acquisition for M&T Bank in Buffalo, N.Y., isn’t out of the question, but it also doesn’t seem to be a top priority for management either.

The $118.6 billion-asset company has fully integrated its 2015 purchase of Hudson City Bancorp and met regulators’ demands to upgrade its anti-money-laundering compliance systems. M&T could be interested in whole-bank acquisitions or in acquiring more branch networks. The company would also consider select businesses like wealth and asset management and mortgage servicing firms, CFO Darren King said Thursday.

Still, M&T's King seemed to have other plans for excess capital.

“I would describe the market right now as fairly quiet. I think everyone is digesting what tax reform means and what it means for their business,” he said. “We wouldn’t sit and wait for something to come around before we deployed capital back to our shareholders.”

The outlook for KeyCorp sums up the situation at many regional banks.

Mooney highlighted the bank's purchase last year of HelloWallet, a personal financial management product, as an example of how the company is continually looking for new opportunities.

Key is likely to continue to pursue these types of deals for at least another year as management focuses on wringing out the final cost saves and achieving promised revenue synergies from the First Niagara deal, Mosby said. The company said it should cut another $50 million in expenses early this year while it expects $300 million in additional revenue by the end of 2019.

Still, management also hopes to increase its dividend payout rate up to 50% after the Office of the Comptroller of the Currency and the Federal Reserve have indicated a push toward a more quantitative view of capital returns through the stress testing process, Mooney said. Its current payout rate is just above 30%, Mosby said.

“We believe that is consistent with what is a good level of payout of stronger earnings for regional banks and also aligns with the interest and rewarding our shareholders and investors,” Mooney said.

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