For those hoping that regional bank M&A would pick up, quarterly earnings calls are probably proving to be a downer.
Congress earlier this year passed legislation that lifted the threshold for systematically important financial institutions from $50 billion of assets to $250 billion. There was hope that change could spur additional bank M&A, especially for larger institutions.
Lifting the SIFI threshold freed up some institutions from enhanced oversight, including capital requirements, and gave smaller regionals more room to grow without fear of crossing a key regulatory line.
But so far, regional banks have largely been quiet, and those that have announced deals have agreed to acquire much smaller institutions, such as the $33 billion-asset BOK Financial’s agreement to buy the $3.8 billion-asset CoBiz Financial.
“I think there's lots of interest in partnerships, but I think everyone's thinking that they're the buyer, not the seller," Darren King, M&T Bank's chief financial officer, said during his company's quarterly call. "I think that's why you're seeing some slower activity than you might expect, given some of the changes that have come out recently with the regulations.”
Some regional bank CEOs seem to be downplaying their interest in bank M&A, partly because they don’t want to appear too aggressive and potentially hurt their stock price, said Gerard Cassidy, an analyst at RBC Capital Markets.
But bigger deals could be more of a 2019 event, especially if other regulatory reforms come to pass, such as a proposal to change the current Camels five-point rating system to one that has a scale of one to four, Cassidy said.
“The biggest hurdle is regulatory,” Cassidy said. “The regulators have to change a number of their handcuffs if you will.”
Kevin Reevey, an analyst at D.A. Davidson, said regional bank M&A might be slow this year because some potential buyers are currently prioritizing other issues, such as digesting other transactions or focusing on organic growth.
“A lot of the larger players are going to be on the sidelines so you won’t see a lot of the large scale deals from those buyers,” Reevey said. “With the SIFI raising, you could some other players that had been on the sidelines come back into the mix.”
Here is a look at some comments from regional bank CEOs about their M&A plans.
While BB&T in Winston-Salem, N.C., remains an interested acquirer, Chairman and CEO Kelly King offered a somewhat sobering assessment of the M&A market.
The $223 billion-asset company has been on the sidelines for more than a year as it dealt with regulatory orders tied to anti-money laundering compliance. All but one of the orders has been removed.
King made it clear that he prefers to look at existing markets rather than entering new ones. That is noteworthy since BB&T's last three bank acquisitions — Bank of Kentucky, Susquehanna Bancshares and National Penn Bancshares — involved new markets.
“I think the odds of us doing out-of-market deals are pretty slim,” the CEO said during a Thursday conference call to discuss quarterly results.
There are several contributing factors, including the availability of acquisition targets and the changing economics for deals. An in-market deal also gives an acquirer a chance to cut more costs in areas such as branches and staffing.
King said the math for past deals involved forecasting increased cash flows, then baking in a discount to come up with a price. Today, it is more likely that a buyer will need to expect declining cash flow, changing the calculus.
King also acknowledged during the call that BB&T’s Pennsylvania expansion had "gone a little slower" that what he had expected, though he assured analysts that activity in the state was picking up.
"I was up there two times last week," he said of Pennsylvania. "It has really turned. ... It’s not a go-go market like Atlanta or Dallas. It’s a stable kind of market, particularly where we are ... so it takes you a little longer, but when you get there, it’s a really good place to be."
King admitted that his team had been approached by four “pretty attractive” potential sellers in the last 60 days. The targets were often too small for BB&T, which is determined to focus on buying banks with $20 billion to $50 billion in assets.
King also weighed in on the potential of investors selling BB&T shares if it announces a big deal.
"I’ll tell you that’s not a smart move because if we do deals, it’s going to be good for our shareholders," he said. "We’re not going to do stupid deals. We’re not going to do deals that have long-term dilutive economics that make no sense to our shareholders. ... If we do a deal, you’ll be happy we did it."
Finally, King pointed to other initiatives at BB&T that could produce strong returns. First, management is looking to reduce costs. BB&T is also focusing more than ever on insurance, including its recent purchase of a business from Regions Financial.
The company has also been investing in IT projects, including stronger digital products.
“When we talk about this change in terms of digital banking and the change in demand for convenience from our clients, that's real stuff,” King said.
KeyCorp in Cleveland made waves in 2015 when it agreed to buy First Niagara Financial for $4.1 billion. But that deal may prove to be the exception rather than the rule for the $138 billion-asset company’s M&A strategy. CEO and Chairman Beth Mooney has shown little appetite since then to do another whole bank acquisition.
“First Niagara was a unique situation for them,” Cassidy said. “They had the infrastructure to bolt on a sizable acquisition without having to incrementally build out systems to handle it.”
Since then, Key has gone on to acquire smaller niche businesses, such as its purchase last year of Cain Brothers, a boutique investment banking firm focused on health care, and HelloWallet, a personal financial management product. Observers should expect more of these types of deals.
Mooney said during Key's quarterly call on Thursday that the company was focused on organic growth and would look to return capital to shareholders through dividends and share repurchases.
When it comes to deals, Key would focus on “people, product and capabilities,” she said. The HelloWallet and Cain Brothers acquisitions were examples of that philosophy.
“Those are examples of how we see augmenting our franchise as appropriate uses of capital in lieu of not … prioritizing bank acquisitions,” Mooney said.
Fifth Third Bancorp
Fifth Third Bancorp in Cincinnati is one of those banks that is likely to be on the sidelines for additional M&A. In a surprise announcement in May, it agreed to buy the $20 billion-asset MB Financial for almost $5 billion.
The company is unlikely to announce another deal soon in part because of how investors have treated its stock, Reevey said. Its stock is down roughly 8% since the deal’s announcement.
“Given the reaction to the deal, I don’t see them doing any sizable deals in the near future,” Reevey said.
During a Thursday conference call, executives said they expect to generate as much as $75 million in additional, pretax income as a result of the MB Financial deal.
Management is now focused on retaining leadership from the Chicago company. That’s important because middle-market and commercial customers are typically loyal to their bankers, Greg Carmichael, the $141 billion-asset Fifth Third's chairman and CEO, said in an interview.
“Job one is to establish an organization that protects the leadership of MB Financial, because they do a better job in middle-market business banking than we do, and they’ve got some other national services, such as [asset-based lending] and leasing for middle market companies, that we don’t have,” Carmichael said.
Carmichael noted that Mitch Feiger, MB Financial's CEO, will become CEO of Fifth Third's Chicago region when the deal closes. The company has also retained the heads of middle-market corporate banking; asset-based lending; and consumer and direct banking, he said.
Additionally, executives overseeing Fifth Third’s existing 1,800 employees in Chicago, in businesses such as commercial real estate and middle market banking, are also staying in place, according to Carmichael.
“That gives the customer base and the employee base a high degree of comfort that, ‘Hey listen, this is going to be better for us, not worse for us,’” Carmichael said.