Stress-Test Failure Clouds M&A for BB&T
Healthier sellers are searching for growth partners instead of saviors, and buyers seeking greater density in their current markets are ready to oblige.February 27
BB&T in Winston-Salem, N.C., could be looking to add to its holdings in the Sunshine State.January 2
Any bankers hoping to sell to Kelly King might need to sit tight for a few months.
BB&T (BBT), led by King, has been among the more active buyers among banks its size. But the M&A profile of the Winston-Salem, N.C., company suddenly changed after the Federal Reserve rejected its capital plan on "qualitative grounds."
BB&T still looks to be a healthy regional bank and a consolidator in the long run, but it could lose out on a gem if an inviting deal prospect surfaces in the near term.
"They most likely have to settle this issue first," says Kevin Fitzsimmons, an analyst at Sandler O'Neill. "Anticipated deals are often a part of the [stress-test] process and essentially they are not approved to increase the amount of excess capital they steer to shareholders. Same logic applies to a potential deal."
BB&T and the Fed declined to comment for this story.
King said this month at the Citi U.S. Financial Services Conference that BB&T is currently focused on adding loans but is always on the prowl for deals.
"We'll look at opportunities when they come along, but we're focused on organic growth," King said March 5. "If the right kind of acquisitions comes along, we'll be very excited about that, too."
BB&T has been focused on targets in the asset range of $2 billion to $5 billion. Since the Fed's rejection of the capital plan was based on qualitative — not quantitative — measures, BB&T still might have some flexibility, several analysts including Fitzsimmons say.
"It is plausible that they could do a small transaction. If they wanted to acquire something that is $3 [billion] to $5 billion, they could maybe get it done," says Chris Marinac, an analyst with FIG Partners.
How the market reacts to the rejection over the next few months will be crucial. BB&T's stock has been trading at 190% of tangible book value. The Fed's announcement came after the market closed on Thursday; on Friday BB&T's stock fell 2.5%, to $30.93. If the market further penalizes the company for not passing, it might avoid dealmaking.
"They may not choose to do a deal if gets down to $29 a share," Marinac says, adding that he doesn't believe that will happen.
The rejection could take the biggest toll if a big fish — perhaps Synovus Financial (SNV) in Columbus, Ga., or First Horizon National (FHN) in Memphis, Tenn., becomes available and BB&T can't pursue it. Given its presence in the Southeast, BB&T would otherwise be a frontrunner in those potential scenarios.
The Fed on Thursday announced it objected to certain qualitative elements of the BB&T's capital plan submitted for the comprehensive capital analysis and review. BB&T's failure is puzzling because its capital proved to be among the most resilient in the tests, but the process is confidential and the Fed is not giving details. Possible reasons run the gamut, from problems with the way BB&T accounts for risk-weightings to regulators feeling a need to be strict, observers say.
"You have to wonder if they just pick a bank that they want to make an example of," says Marty Mosby, an analyst at Guggenheim Securities. "It is a way to poke the bear and say, 'You're not getting away from us yet.'"
The $184 billion-asset BB&T has until June 11 to resubmit its plan and the Fed then has 75 days to respond.
BB&T's operating model does not rely on acquisitions, Mosby says. Also in BB&T's favor is that the rejection while the bank M&A market still still relatively quiet, he says.
"If there was an opportunity that comes up in the next six months, maybe this puts them out of the mix," Mosby says. "Then again, the likelihood that they miss anything big is probably small."