The Long and Short

BankUnited looks like a takeover target

| August 5, 2022

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.

BankUnited has steadily looked like a target during significant M&A among regional banks in the last few years. With approximately $36 billion in total assets and an attractive footprint in its home state of Florida, the bank is in the range of merger targets that have been successfully executed by larger, higher-rated peers over the past few years. A takeover would likely mean tighter spreads on current BankUnited debt.

There has been a significant amount of M&A in the US regional bank space over the past several years (APS: Bank M&A Update, APS: Bank mergers ahead). BKU has stood out as a potential merger candidate.

Exhibit 1. BBB Regional Banks (senior and subordinated issues included)

Source: Amherst Pierpont, Bloomberg/TRACE Indications

BKU 5.125% 06/11/30 @ +240/10YR; G+236; 5.10%; $100.16

Comparable securities:
NR/BBB    CFG  2.638 9/32  ~220/215 (SUB)
Baa3/BBB- FHN  5.75  5/30  ~235/230 (SUB)
Baa1/BBB  WBS  4.10  3/29  ~215/210 (SENIOR)

Issuer: BankUnited Inc. (BKU)
CUSIP: 06652KAB9
RANK: Subordinated HoldCo
Amount outstanding: $300 million (Index-eligible)
Sub ratings: Baa2/BBB-
Global Deal

BKU operates almost exclusively in its home state of Florida, where almost all of its 66 branches are currently located. The bank has roughly $36 billion in total assets as of the first quarter of 2022, with about $29 billion in total deposits and $23 billion in total loans.

BKU has a well-diversified loan book by loan category. The bank has 37% of loans in residential, 25% in commercial real estate (CRE), 17% in commercial & industrial loans (C&I), with about 13% categorized as other non-real estate loans.

BKU currently maintains high capital ratios versus peers. The bank’s Tier 1 Common (CET) ratio was 12.53%, and its total risk-based capital ratio was 14.25%, as of the first quarter of 2022.

The bank has a stable funding profile primarily utilizing traditional deposit funding and is not overly reliant on higher-risk wholesale funding. BKU’s total loan/deposit ratio was just under 82% as of the first quarter of 2022, as the bank maintain deposits well in excess of their total loan book. BKU’s total reliance on wholesale funding as of the first quarter of 2022 was 27%, which is appropriate relative to its funding profile, and the bank has negligible levels of short-term wholesale funding. The percentage of brokered deposits is also very manageable at less than 16%.

Moody’s upgraded BKU to Baa2 from Baa3 in late 2021, concluding a review initiated in August of that year. The higher rating reflects improved core deposit funding, reduced asset risk concentrations, and improved technological changes.

BKU has very low delinquencies in their loan books, reflecting relatively conservative lending practices. Non-performing assets (NPAs) were just 0.72% of total assets as of the first quarter of 2022, with reserves covering just under 50% of classified loans. The bank’s adjusted Texas Ratio (which measures total NPA and 90-day past due loans as a percentage of tangible equity and loan loss reserves) was 13.70%. Any score below 20% is considered appropriate for a mid-sized regional bank.

Dan Bruzzo, CFA
dan.bruzzo@santander.us
1 (646) 776-7749

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