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On Thursday, BB&T announced a deal to buy rival SunTrust Banks for $28.24 billion in an all-stock deal – creating the sixth-largest bank in the U.S., worth $66 billion.
The combination of Kelly King of BB&T and William Rogers of SunTrust is going to be a powerhouse management team that performs at a very high level and is able to compete effectively with JP Morgan, Bank of America and Citigroup.
This merger, which Mr. King calls “a merger of equals,” should work out well for the new combined company. BB&T (BBT) is strong in community banking and insurance while SunTrust (STI) has a large presence in the commercial middle market segment as well as investment banking.
It also allows them to gain scale and enables substantial cost savings by spreading fixed costs over a much larger asset base. Much of that savings will be used to play catch up and keep up in technology.
This is a very good deal for the shareholders of both banks. There will be substantial cost savings and adds to the book value and earnings of the surviving bank in year one. Kelly King has proven himself to be the master of the deal during his career and this may well be his crowning achievement.
The new bank will have an average return of common equity of 22% according to the statements released this morning. It will also have $442 billion in assets, $301 billion in loans and $324 billion in deposits, making it the 6th largest bank in the United States.
This is the biggest bank deal in over a decade and it’s likely to be just the first of big bank deals now that the Systemically Important Financial Institution levels have been raised.
I’m About to Show You How to Find Banks In The Merger “Sweet Spot”
It is very difficult for regional banks to maintain the type of growth that satisfies shareholders in a low growth economy via organic measures. The only way to grow is to buy in this environment.
The demand for digital and online banking is growing every day and that’s not going to change. Neither will the need for constantly rising cybersecurity costs.
Banking has turned into an industry where bigger truly is better. A few years ago, the sweet spot of the industry — the segment with the highest returns on assets and equity — was banks with assets of between $5 and $10 billion. That has shifted as costs have risen and growth has slowed.
The sweet spot is now those banks with more than $50 billion in assets. The bigger banks are continuing to take market share from the rest of the industry as the top 20 banks now control 40% of industry assets.
This isn’t going to change anytime soon. The smaller banks simply cannot keep up with the larger ones and the need for digital spending is going to make sure that bigger remains better.
The large bank merger wave I see developing is going to filter down to smaller banks as the year progresses. We will see small trying to get mid-sized and mid-sized trying to get large. Scale is going to be important than ever, particularly if the rate of economic growth does not pick up.
Identifying those banks that have a target on their back is going to be a wildly profitable endeavor over the next several years.
Don’t go away, because I’ll have more details on how to do that on Tuesday.
To the Max,