Regional Bank mergers likely to continue in 2021

| December 18, 2020

This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors. This material does not constitute research.

In the closing weeks of 2020, two major regional bank mergers were announced in the in the United States – PNC Financial’s purchase of BBVA USA Bancshares on November 16 for $11.6 billion, and Huntington Bancshares purchase of TCF Financial for just over $5 billion announced on December 13. These deals could be the start of a significant wave of consolidation in the sector, one the industry has been anticipating for years. Low rates and weak loan demand make operating efficiency one of the few ways for banks to defend profits. For debt investors, the tightening in spreads that comes with an acquisition makes it worth building a position in bank acquisition candidates.

The environment is ripe for consolidation beyond just pent-up demand. Bank balance sheets have expanded over the past several quarters as deposits have ballooned. Meanwhile, the prospects for loan growth have dimmed with the sluggish economy amidst the pandemic. These factors, along with easy access to capital, help create an ideal environment for further bank deals to be announced in the coming year. Bank regulators have also appeared increasingly receptive to mergers of this size.

Though an acquisition was widely anticipated, the PNC (A3/A-/A+) deal for BBVA USA (BCOMPS) is a game changer for the franchise, almost as transformative as their deal for Nat City at the height of the financial crisis. They will be adding $102 billion in total assets, $86 billion in deposits, and vastly expanding their footprint into the south and southwest US to become the largest regional bank in the nation by total assets ($564 billion). The $11.6 billion transaction is being structured as all cash, which is unusual for a post-crisis bank deal, but not surprising as PNC liquidated its stake in Blackrock ($15+ billion) back in May and will be using the proceeds to finance the transaction. This mitigates the credit implications of the deal, but does not rule out that they might choose to use some component of debt for funding given the attractive environment for debt issuance. All ratings were left with stable outlooks by the rating agencies.

BBVA USA 5-year notes (BCOMPS 3.875% 04/10/25) were indicated at a G-spread of roughly 190 bp at the beginning of November, and 158 bp immediately preceding the acquisition announcement. Those bonds are now indicated at the bid side at approximately 80 bp to the curve.

The HBAN (Baa1/BBB+/A-) deal for TCF will be 100% stock funded (more typical): $6 billion at $38.83 per share of TCF, pending shareholder approval. The combination will make HBAN a top 10 US regional bank with $117 billion in total loans and $134 billion in total deposits. The tie-up is a very good strategic fit, as they will expand deeper into MI, MN, and add presence in the Chicago, Denver, and Minneapolis markets. S&P revised the outlook on HBAN to negative reflecting the weaker underlying credit quality of the target bank, while Fitch left their outlook at negative reflecting not only integration risk, but ongoing challenges that were present at HBAN.

TCF Financial’s 10NC5 notes issued earlier this year (TCB 5.50% 05/06/30) are currently indicated at a G-spread of about 443 bp or a yield-to-call of approximately 4.75%. The bonds are actually trading about 5-10 bp wider than before the deal was announced. With HBAN 10-year bullets indicated at approximately +85 bp to the curve, the spread on the TCB notes should compress drastically from their current indication. It is possible that the lack of liquidity in the name explains the discrepancy in price, as the bonds have not traded since the announcement of the merger.

In order to identify potential merger candidates for investors to target in the corporate bond market, we ran a screen identifying large community and smaller regional banks with between $20 billion and $75 billion. Technically, BBVA USA had assets of over $100 billion, but the more likely candidates will lie in the stated range. The list was limited to banks with public debt deals with at least $20 million outstanding, which would make them more available in the secondary bond market. TCF was among the names identified through this process (Exhibit 1). Several other candidates are presented as more or less likely based on their footprint, operations, loan mix, and recent activity by management (Exhibit 1).

Exhibit 1. Bank merger candidates

Source: Amherst Pierpont Securities, Bloomberg LP

First Horizon (FHN: Baa3/BBB-/BBB) with now $83 billion in total assets would technically move outside the range of our study, with the closing of their recent merger with IBERIABANK in November of this year. Still, the bank has long been considered a prospective target for larger regional bank players in the US landscape, that might be seeking to expand their footprints into southern regions, such as FHN’s home state of Tennessee, North and South Carolina, Mississippi and now Louisiana through the purchase of IBERIABANK. Management has now established itself as more of a buyer than a seller with its recent activity, but overtures from the larger players in the space still cannot be ruled out.

New York Community Bancorp (NYCB: Baa3/BB/BBB-), Signature Bank (SBNY: Baa2/BBB), and Sterling Bancorp (STL: Kroll – BBB) all make the screen with total assets of $54 billion, $51 billion, and $31 billion, respectively. What makes these banks unique amongst the other candidates are their large exposures to multifamily (apartment) lending in the greater New York City and surrounding regions. These names have generated a lot of attention from investors over the past two years – first in 2019 with concerns about legal changes that have mitigated landlord rights in the region, and more recently with the threat of urban flight and dropping apartment prices in NYC. While this does not rule them out as merger targets, it makes them considerably more niche than many of the bigger consolidators might be seeking.

Rarely does a discussion of regional bank candidates take place without some mention of Wintrust Financial (WTFC: BBB). The Chicago-based lender is perceived as having one of the most attractive urban footprints among banks of its size. WTFC is itself the product of rapid consolidation of smaller branches within the region, having more than tripled in size since the financial crisis through the acquisition of several smaller Chicago-based lenders. The bank presents itself as the community alternative to the big money center banks, but would still be an attractive target for any number of Midwest-based large regional banks seeking to gain a better foothold in the prized Chicago market.

Texas Capital Bancshares (TCBI: Baa3/BB+) attempted to buy fellow Texas lender Independent Bank Group (IBTX) at the close of last year, but the deal was terminated back in May. The deal would have added $17 billion in total assets and $14 billion in deposits to TCBI’s existing $38 billion and $32 billion, respectively. The failure to execute the merger leaves both banks as potential cogs for a larger entity seeking to gain exposure to the attractive Texas market.

Fulton Financial (FULT: Baa1) with $25 billion in total assets and $21 billion in total deposits across its attractive footprint of its home state of Pennsylvania, New Jersey, Maryland, and Delaware, has always appeared an attractive candidate for banks seeking to add exposure to Northeast/MidAtlantic banking operations. The bank boasts a very conservative and well-diversified loan portfolio with highly stable deposit-based funding.

Exhibit 2. Spread opportunity in smaller bank merger candidates

Source: Amherst Pierpont Securities, Bloomberg/TRACE G-spread indications only

john.killian@santander.us 1 (646) 776-7714

This material is intended only for institutional investors and does not carry all of the independence and disclosure standards of retail debt research reports. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.

This message, including any attachments or links contained herein, is subject to important disclaimers, conditions, and disclosures regarding Electronic Communications, which you can find at https://portfolio-strategy.apsec.com/sancap-disclaimers-and-disclosures.

Important Disclaimers

Copyright © 2024 Santander US Capital Markets LLC and its affiliates (“SCM”). All rights reserved. SCM is a member of FINRA and SIPC. This material is intended for limited distribution to institutions only and is not publicly available. Any unauthorized use or disclosure is prohibited.

In making this material available, SCM (i) is not providing any advice to the recipient, including, without limitation, any advice as to investment, legal, accounting, tax and financial matters, (ii) is not acting as an advisor or fiduciary in respect of the recipient, (iii) is not making any predictions or projections and (iv) intends that any recipient to which SCM has provided this material is an “institutional investor” (as defined under applicable law and regulation, including FINRA Rule 4512 and that this material will not be disseminated, in whole or part, to any third party by the recipient.

The author of this material is an economist, desk strategist or trader. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM or any of its affiliates may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.

This material (i) has been prepared for information purposes only and does not constitute a solicitation or an offer to buy or sell any securities, related investments or other financial instruments, (ii) is neither research, a “research report” as commonly understood under the securities laws and regulations promulgated thereunder nor the product of a research department, (iii) or parts thereof may have been obtained from various sources, the reliability of which has not been verified and cannot be guaranteed by SCM, (iv) should not be reproduced or disclosed to any other person, without SCM’s prior consent and (v) is not intended for distribution in any jurisdiction in which its distribution would be prohibited.

In connection with this material, SCM (i) makes no representation or warranties as to the appropriateness or reliance for use in any transaction or as to the permissibility or legality of any financial instrument in any jurisdiction, (ii) believes the information in this material to be reliable, has not independently verified such information and makes no representation, express or implied, with regard to the accuracy or completeness of such information, (iii) accepts no responsibility or liability as to any reliance placed, or investment decision made, on the basis of such information by the recipient and (iv) does not undertake, and disclaims any duty to undertake, to update or to revise the information contained in this material.

Unless otherwise stated, the views, opinions, forecasts, valuations, or estimates contained in this material are those solely of the author, as of the date of publication of this material, and are subject to change without notice. The recipient of this material should make an independent evaluation of this information and make such other investigations as the recipient considers necessary (including obtaining independent financial advice), before transacting in any financial market or instrument discussed in or related to this material.

The Library

Search Articles