BB&T Corporation (NYSE: BBT) – market cap as of 11/02/2019: USD 38.48bn

SunTrust Banks (NYSE: STI) – market cap as of 11/02/2019: USD 29.06bn

Introduction

The all-stock $66 billion merger between BB&T and SunTrust banks is the biggest M&A deal for the banking industry in more than a decade, signalling bank executives’ growing confidence that the regulatory constraints imposed after the 2008 financial crisis have begun to loosen. It will create the sixth-largest U.S. bank with around $442 billion in assets, $301 billion in loans and $324 billion in deposits, just behind U.S. Bancorp (USB).

Source: Bloomberg

Through the sharing of know-how and the cutting of costs implied by the merger, the two companies hope to compete successfully with incumbents such as Citi and Bank of America, and to face the emerging competition of PayPal, Apple, and Google in the arms race for technology.

Investors in both firms appeared pleased by the transaction. Shares of BB&T were up 4 percent on Thursday, to $50.46, while those of SunTrust were up 10 percent, to $64.72.

The deal is expected to close by the end of the year, pending regulatory and shareholder approval.

About SunTrust Banks Inc

Founded in Atlanta, Georgia, U.S, in 1891, SunBanks became the first national bank in 1920, but like many other financial institutions it failed in 1930 during the great depression. In 1985, it merged with Trust Company of Georgia to form SunTrust Banks, Inc. Through this merger, the bank became one of the most flourishing banks of the USA, with the core activity concentrated in Florida and Georgia.

The bank’s primary businesses include deposits, lending, credit cards, and trust and investment services. Through its various subsidiaries, the company provides corporate and investment banking, capital markets services, mortgage lending, and wealth management. It has nearly 24,000 employees.

The company has been growing in the last 10 years thanks to a series of acquisitions of smaller financial institutions, such as the Florida branches of Huntington Bancshares, a bank holding company, and Lighthouse Financial Services, a wealth management firm.

About Branch Banking & Trust Co

Founded in 1872, BB&T Corporation is a bank holding company based in Winston-Salem, North Carolina with $225.7 billion in assets. It operates 2,049 branches in 15 states and Washington, D.C., and it offers consumer and commercial banking, securities brokerage, asset management, mortgage, and insurance products and services. It is ranked 16th on the list of largest banks in the United States by assets and its subsidiary, BB&T Insurance Services, is one of the largest insurance brokers in the world. Like SunTrust Banks, the company has been growing over time thanks to 106 mergers and acquisitions. Among them, in August 2015, the bank acquired Susquehanna Bank for $2.5 billion, adding 240 branches and $18.7 billion in assets, and marking the bank’s entry into Pennsylvania and New Jersey.

Industry Overview

At the beginning of the 1980’s, the US banking system had approximately 14,000 firms and banks did not have branches from coast to coast due to laws that kept them from crossing state lines. With the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, restrictions on interstate bank acquisitions were abolished and interstate branching was made possible for the first time in seventy years. Thereupon, a wave of bank deals followed, driven by a few aggressive firms that started spreading throughout the US and thus creating the giants that dominate retail banking today. However, banks were severely hit by the 2008 crisis and its subsequent regulations, bringing the M&A rush to a halt.

Today, the 5,700 banks left in the US are facing two major challenges: the growing importance of being up to speed with technology and the competition brought by non-bank financial institutions.

The banking industry is going digital and this is bringing structural changes. BB&T CEO, Kelly King, for instance, points out to the fact that in the last three years there has been more innovation than in the past decades. Technology is vital for the industry but is does not come cheap. Indeed, banks are increasingly spending large amounts of money to adapt to clients’ demand for mobile and digital services and to reinforce cyber security. For instance, Bank of America allocated $16bn for global technology and operations in 2017, while 20% of Citi’s entire budget is dedicated to technology spending.

Fintech start-ups might bring their own dose of pressure as well. These tech companies tend to specialize in specific segments of finance, such as lending or savings accounts and usually partner with a federally-insured bank who holds the customer deposits on their behalf, without having to face the strong regulations that commercial banks do. The fintech industry has grown steadily and as of today there are 39 unicorns (privately owned companies valued at more than $1bn) in the world. In this context, a collaboration could make perfect sense: fintech firms have struggled to scale profitably on their own due to lack of confidence, capital, or infrastructure while retail banks have a vast customer base and deep pockets. Consequently, banks have been keen to search for the very best fintech companies and collaborate with these companies in order to offer improved and more targeted services to their clients.

Deal Structure

On February 7th, BB&T struck a deal to buy SunTrust for $28.2bn, in the largest US bank merger since the financial crisis. The deal, as customary in the banking industry, is an all-stock merger since the tight capital structure requirements that banks have to face prevent them from paying cash and thus from running too low on capital or too high on debt.

As declared in the companies’ statements, BB&T’s shareholders will own 57 % of the newly combined company and SunTrust’s shareholders will receive 1.295 shares of BB&T for each SunTrust share they possess, amounting to a $28.2bn valuation of the company. The deal does not present a substantial premium for SunTrust’s shareholders, which investors regarded positively, as they expect earnings accretion with a minimal change of book value.

The merged firm, will have nearly 60,000 employees and around $442 bn in assets making it the 6th largest commercial bank in the U.S. by assets. Furthermore, both companies stated that the combined company will have a 22% return on tangible equity, higher than any of the larger U.S. lenders.

Deal rationale

The deal is backed first and foremost by a desire to pursue economies of cost. Indeed, the combination, is expected to generate an estimated $1.6bn in net cost savings by 2022. The driver of cost synergies is the overlapping regional footprints in the Southeast and in the mid-Atlantic. Operating expenses will be cut by more than a tenth, leading to an efficiency ratio of 51%, the lowest among US consumer banks, and the merger is expected to generate an internal rate of return of approximately 18% and it is expected to be 13% accretive to BB&T’s earnings per share and 9% accretive for SunTrust. In addition, the combined group will become a more formidable competitor to larger rivals in Washington DC, in Baltimore, in Maryland and in Richmond.

Another reason for the deal is the promise of lighter regulation. Since Trump got to the White House, the Federal Reserve said that rules for banks between $250bn and $750bn in assets should be “tailored”, including an easing of liquidity requirements. In addition, with both banks on the verge of reaching $250bn in asset, the amount requiring a stricter oversight by the Federal Reserve since the bank relief law passed last year, joining the forces of the two banks would guarantee more scale, while at the same time providing a runway for growth to $750bn in assets.

The deal will also help the banks to innovate faster and better compete in the ever-changing digital banking world, where with the rise of automation, scale efficiencies should be more easily captured. Indeed, scale will enable more investment in technology such as smartphone apps, fundamental to attract younger customers, but it will also decrease the costs related to it, such as cybersecurity and maintenance of IT systems.

Executives also noted that they expect a low level of deposit divesture since BB&T’s more rural deposit base and SunTrust’s more urban deposit base complement one another. According to an investor presentation the combined entity would probably have to divest deposits worth about $1.35bn.

The downside of the deal is represented by the complexity of bringing together the culture and people of the two organizations. Indeed, the BB&T and SunTrust estimate the cost of the transaction tie-up at about $2bn.

Market reaction

On the day the deal was announced (7th February, 2019), everybody won. Both SunTrust’s and BB&T’s shares increased in value, the former of 10%, the latter of almost 4%. But the impact of the deal on market was even wider: other regional banks shares rose in anticipation of action. Comerica’s shares rose 5%, while Huntington’s and KeyCorp’s shares rose 4%. It is worth mentioning that the deal did not affect the stock prices of larger banks such as JPMorgan or Bank of America because of regulation ruling out mergers between the industry’s national players.

Financial advisors

RBC Capital Markets acted as financial advisor to BB&T; Watchell, Lipton, Rosen & Katz acted as BB&T’s legal counsel. Goldman Sachs and SunTrust Robinson Humphrey acted as financial advisors to SunTrust, while Sullivan & Cromwell was its legal counsel.


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