In finally bagging its white whale, BB&T shakes up banking landscape

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Lots of pieces need to fall into place for a large bank deal to come about. It appears that happened with BB&T's agreement to buy SunTrust Banks.

The inescapable role that massive technology investments are playing in the future of banking is one of the biggest factors. While BB&T and SunTrust have made tech a top priority, they realized they could make those investments more efficiently if they combined, industry experts said.

At the same time, both companies were rapidly approaching the $250 billion asset threshold that triggers stricter regulatory capital requirements, so it made sense for them to vault over that mark together rather than inch over in coming years.

The most important piece may have been that the banks’ leaders — Kelly King at BB&T and Bill Rogers at SunTrust — wanted the deal to happen.

“We talked about the fact that, in order to survive in this quickly changing world, it's important to be willing to change,” King, BB&T’s chairman and CEO, said during a Thursday conference call to discuss the $28 billion deal.

“In a relatively short period of time, we were able to put the deal together because it’s just such a logical deal,” King added. “I think it’s just one of those natural things that just evolved when two good companies and, I’ll speak for Bill, a great leader sees what the possibilities are.”

BB&T had long coveted SunTrust, but the Atlanta bank’s prior leaders resisted, said Chris Marinac, an analyst at FIG Partners. Rogers, SunTrust’s chairman and CEO, didn’t allow a longstanding rivalry to stand in the way of a logical business move.

“Taking the best of BB&T and taking the best of SunTrust really does make sense,” Marinac said. “How do you get more earnings growth? You combine two companies and marry the back offices.”

The need to continually make big tech investments probably led to the combination as much as any other supporting factor, said Rob Klingler, a banking lawyer at Bryan Cave Leighton Paisner.

“You’re not going to have to make the same technology investments twice,” Klingler said. “You don’t need two mobile apps. Now you can hire one team of programmers instead of two teams.”

The combined company’s larger scale may provide better leverage to negotiate lower pricing on contracts with Microsoft, IBM or other vendors, Klingler said.

King, in a video message to BB&T employees, touted the new company ability to compete with the nation's biggest banks.

"Remember, as we go through this that we not only can compete with anybody — JPMorgan, Bank of America, Citigroup — we will be able to compete heads up with anybody," King said. "We will be better, I believe, than any of those larger banks because we still have better touch. We can compete. We will compete. We will win."

Cost savings were a prime topic during the conference call.

The deal is expected to create a company with a 51% efficiency ratio, a level that would be unimaginable for each bank to achieve on its own.

BB&T’s efficiency ratio at Dec. 31 was 60.7%, while SunTrust’s was 62.7%.

During a fourth-quarter conference call, SunTrust executives were peppered with questions about the company’s high efficiency ratio. It was always going to be a challenge for SunTrust to improve due to the incentive-based compensation tied to its large investment bank, Marinac said.

"Our business model, I think, given the way we're structured, we're not going to be a low-50% efficiency ratio company,” Rogers said during last month’s conference call to discuss earnings.

BB&T and SunTrust will also cut costs by closing or selling branches and eliminating redundant jobs. About a quarter of the banks’ branches are within two miles of each other.

“This overlap is almost unparalleled in banking, particularly among larger institutions,” Daryl Bible, BB&T’s chief financial officer, said during the call.

The companies plan to divest about $1.4 billion of deposits to receive regulatory approval.

The plan is to generate about $1.6 billion in annual pretax cost savings, net of investments, by removing redundancies with facilities, IT, shared services, branches and third-party vendors.

It’s a move many other banks should seriously consider, as the combined company will be better equipped to handle a recession or a decline in loan demand, said David George, an analyst at Robert W. Baird.

“This is what the sector needs, given the tougher growth outlook over the near-to-intermediate term,” George wrote in a Thursday note to clients.

The new company, which will be rebranded and based in Charlotte, N.C., will not pocket all of those savings. The plan is to earmark an additional $100 million a year to technology investments.

BB&T said in November that it spends about $1 billion a year on technology. SunTrust has not disclosed its level of tech spending.

"Increasing [technology] investments by $100 million and still maintaining a 51% efficiency ratio shows the market how important scale is,” said Stephen Scouten, an analyst at Sandler O’Neill.

The regulatory environment seems more conducive to big deals, especially transactions involving banks of this size, Klingler said.

When the threshold for systemically important financial institutions was raised from $100 billion to $250 billion in assets, it removed a critical barrier to this level of M&A.

“Both BB&T and SunTrust had already done the work and built up the infrastructure to go over $250 billion,” Klingler said. “Instead of growing slowly over $250 billion, just go ahead and combine.”

The banks plan to complete the deal this year, with King even commenting that it could close on Sept. 12, his birthday. King, who will turn 71 on that date, had long hoped to pull off a huge deal before retiring from the only company he has ever worked for.

King expressed confidence during Thursday’s call that the deal would get regulators’ blessing.

“There’s nothing that I can see that will stand in the way of this combination,” King said.

The final hurdle was more of a psychological issue than a financial one, industry observers said.

John A. Allison, BB&T’s former chairman and CEO, said those kinds of impediments prevented a deal between the two companies from happening sooner. Allison, who admitted talking to Regions Financial and Fifth Third while at the helm, always envisioned BB&T striking a deal along the lines of what was announced Thursday.

“We pursued SunTrust when I was there,” said Allison, who retired as CEO in 2008 and as chairman a year later. “We couldn’t get the cultural issues resolved.”

Addressing the deal as a merger of equals, with parity in the executive suite and the boardroom, seems to have solved those problems, Marinac said.

“BB&T had been pursuing SunTrust for decades, but the prior management at SunTrust didn’t want to hear it,” Marinac said. “I think they realized that more is better economically. It’s about trying to get the right sort of framework.”

The effort makes sense, given King’s long-held approach to bank M&A.

"I created a measurement system 25 years ago — I still keep the sheet in my desk — that's based on quality, profitability and growth in that order," King said in a 2015 interview after being chosen as American Banker’s Banker of the Year.

"Growth is always third,” King said. “When I look at a merger, it has to be strategically and culturally right and the economics have to make sense. That's why you haven't seen us do any stupid things."

Paul Davis contributed to this article.

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