Pandemic pressures push US banks towards consolidation

The pressures of the pandemic and a warm investor reception for recent acquisitions have increased the appetite of midsized US banks for more deals such as last week’s $7.6bn sale of People’s United Financial to M & T Bank, industry dealmakers and analysts say.

Likely buyers include such US regional lenders as US Bank and Citizens Financial, as well as Canada’s TD Bank and Bank of Montreal, they say. Smaller US banks and foreign lenders with weak returns and less reason to remain in the US, such as Spain’s Santander, are seen as more likely to sell.

“Everybody wants to do a deal,” said one veteran dealmaker who advises banks and other financial groups. “That’s the difference now from the past.”

Bankers warn that not all prospective deals will be easy to execute. HSBC, which confirmed this month that it was exploring a sale of its 150-branch US retail bank, might simply wind down the operation, said one company insider.

But the pandemic has highlighted the advantages of size in banking. With branches closed or customers wary of visiting them, digital banking has become more important, putting pressure on banks to invest.

At the same time, low interest rates and lacklustre demand for loans have made it more difficult for lenders to profit from their swollen deposit bases. Greater economies of scale represent a way to increase returns.

“Any bank that’s below the top four or five, especially in retail banking, has to be asking itself some very serious strategic questions,” said a senior figure at one midsized US bank. “It’s not foreign versus domestic, it’s all about scale.” 

The biggest US banks are JPMorgan Chase, with more than $3tn in assets, Bank of America at $2.3tn, Wells Fargo at $1.8tn and Citigroup at $1.7tn. PNC would become the fifth-biggest if it completes its $11.6bn announced takeover of BBVA’s US operations. Truist and US Bank come next.

The investor reaction to recent bank deals has increased their likelihood. North Carolina’s First Citizens’ share price has more than doubled since it announced its $2.2bn acquisition of CIT Group on October 16. PNC is up more than 40 per cent since its BBVA deal a month later, beating the 33.5 per cent rise in the KBW Nasdaq Bank Index over the same period. 

“With respect to bank deals, the market tends to be cyclical — they like deals or they don’t like deals,” Rodgin Cohen, the Wall Street lawyer and bank adviser. “Starting with the rapturous response to First Citizens, the market has been quite receptive.” 

Scott Siefers, an analyst at Piper Sandler, said that banks’ appetite for deals had also improved in the past six months because the “credit cycle is sort of melting away” and banks no longer fear unknowable Covid-related loan losses on their books or the books of rivals. 

One factor that could hold back bank deals is that several big players are digesting recent acquisitions — and regulators balk at simultaneous acquisitions because they carry operational risks. For that reason, PNC, M & T, and Huntington, which announced a $5.9bn deal to buy TCF Financial last year, are in effect out of the game for the next few years. 

“I don’t think we’re going to see a bonanza, but I don’t think it’s going to go back to the point where it’s one or two deals a year either,” said the veteran financial dealmaker.

Canada’s top banks, which have a sizeable presence in the US, are seen as more likely acquirers.

“They have the large balance sheet in Canada, and they have limited market share in the US, which is a secular growth opportunity,” said Ebrahim Poonawala, Canadian banks analyst for Bank of America.

TD Bank, which has just over $400bn in assets, is described by bankers as a potential acquirer of HSBC’s US network. HSBC has a strong presence in the eastern US and Florida, which compliments TD’s footprint. 

However, a person familiar with HSBC’s business said it could prove difficult to sell because of the way its costs are entangled with its parent, which makes it hard to value, and because it has no unique selling proposition once it is stripped out of HSBC’s global network. 

HSBC also has a smaller universe of potential buyers because foreign banks tend to favour cash deals, rather than receiving stock in the acquiring company, which they would have to retain for a lock-up period and whose value could fluctuate. 

PNC was able to pay cash for BBVA because it had built up a $17bn war chest by selling its stake in asset manager BlackRock last summer. M & T also paid cash for People’s. Such deals are rare, bankers say, since acquiring banks typically do not have much cash on their balance sheet. 

Shareholders in US banks would have no such qualms about accepting stock as payment and their managements could find it hard to turn down offers.

“The vaccine is out there, there’s a big fiscal stimulus plan, there’s massive monetary accommodation,” said a financial industry dealmaker. “A year ago, there were some pretty good excuses not to do something. Those exogenous factors have really disappeared.”

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