by Murray Bibb, Porter White & Co.
It was a run-of-the-mill Thursday morning — save for the record high temperatures approaching 80 degrees during the first week of February 2019 — as I was enjoying a pre-daylight cup of coffee and reading the Wall Street Journal on my iPad®, when a news alert appeared that caught my attention. The headline read, “BB&T and SunTrust to Combine in Merger of Equals to Create the Premier Financial Institution.” Wait, what?!? Did I need another cup of coffee? Had I misread the article? Was this #FakeNews?
The answers were all “no,” although I did have another cup of coffee…or two. Purely on the surface the tie-up appeared to make all the sense in the world. The initial shock was simply that there had not been a bank deal anywhere near the size and significance of the proposed MOE between Winston-Salem, NC-based BB&T Corp. and Atlanta, Ga.-based SunTrust Banks, Inc. since the high-priced stock deals of the mid-2000s. In fact, the day prior to the announcement, one veteran bank analyst wrote a timely opinion piece championing the returns generated from the operating leverage, or scale, derived from successful MOEs.
To be clear, this article isn’t about the BBT-STI merger per se. However, for context alone, the combination — an all-stock transaction valued at approximately $66 billion — is the 8th largest U.S. bank deal ever (as ranked by deal value at the time of announcement) and is the single largest U.S. bank deal since the J.P. Morgan-Bank One merger in 2004, creating the 8th largest bank holding company in the U.S. with $442 billion in assets.
Since it’s probably not a stretch to assume that if you are still reading this, then the merger announcement caught your attention as well. And what often gets lost in the midst of all the water cooler talk around pricing multiples (1.77x of tangible common equity and 10.0x earnings) and management teams (almost uncomfortably egalitarian) are the ways that strong competitors look to take advantage of the intended and unintended consequences of a deal as significant as the BBT-STI merger.
Retaining (good) customers is a constant battle given the current competitive forces, causing bankers to often spend as much time focused on not losing accounts as opposed to generating new ones. Large-scale operating changes involved in a complex merger can also give more reason for competitors to recruit a bank’s most valuable asset: its human capital. Conversely, if any banking talent becomes disenchanted throughout a merger process, the deal can become exactly their incentive needed to explore different opportunities.
A prima facie case of how industry consolidation can impact a banking landscape can be seen no further than in Birmingham. When banks merge, operations staff are almost always “stream-lined.” But when banks merge with overlapping footprints, client-facing employees are also displaced, voluntarily or involuntarily. Even today in Birmingham, it isn’t uncommon to hear someone mention Central Bank of the South and First Alabama Bank, or even more contemporary name likes AmSouth and SouthTrust, when referring to local banking giants like Regions, BBVA Compass and Wells Fargo. The point is that people identify with and are loyal to other people, often much more than they are to the company that person represents. For further proof, look no further than the organizers’ resumes of the many successful de novo banks and bank re-capitalizations in Alabama over the last 15 years.
Possibly the most curious part of the BBT-STI announcement was the revelation of plans for the combined company to establish a new corporate headquarters in Charlotte, N.C. under a new brand. Even though the company will maintain its community banking and wholesale banking centers in Winston-Salem and Atlanta, this decision could be an unnecessary risk to add to the already challenging process of merging two banks that each have over $200 billion in assets.
Interestingly, BB&T and SunTrust have surprisingly little retail overlap given their respective sizes in the southeast. According to estimates, the combined company will have to divest ap-proximately 740 branches with $1.27 billion of deposits, mostly focused around Atlanta, Washington, D.C. and Miami. Beyond mandatory divestitures, the extent of any plans to consolidate or shutter other branches is unknown. Conveniently though, the topic of retail networks is the perfect segue into the final item we’d like to discuss, which is giving more than a perfunctory consideration of branch sales.
No amount of market research or feasibility study can be done to gauge the decision-making process of retail and commercial customers. Of course, a certain amount of customer attrition is always assumed from any merger; however, fintech advances combined with the unabridged access to information have commoditized certain financial services products to the point that switching costs have effectively been eliminated.
Considering the attractiveness of low-cost core deposits in the current banking environment, there would likely be a long line of suitors interested in purchasing any branch under consideration to be closed. Now, a 10 percent premium on a branch with $20 million in deposits might amount to a little more than a rounding error on the financials of larger institutions. So, while the upside of selling branches on a discretionary basis may be limited, it can far outweigh the potential liability of carrying the real estate for closed or unprofitable branches.
As the old adage goes, the long-term success of any business combination depends on three things: execution, execution and execution. The BBT-STI merger will be followed closely by banks of all shape and sizes to see not only how they might benefit from any potential disruption from the deal, but also how the current regulatory framework in Washington will consider big bank M&A in the coming years.
Murray Bibb is an investment banker with Porter White & Company in Birmingham.