Last week, on the heels of the massive BB&T-SunTrust merger, I told you I’d show you how to profit off the massive bank merger wave I see developing.
Tuesday has arrived, and I’m as good as my word.
The ongoing bank consolidation trend has its roots in the 80s, when the interstate banking laws were changed to allow cross state line ownership.
The trend accelerated in the aftermath of the S&L crisis when the prices of good banks fell right along with the ones that were overloaded with junk bonds and dubious real estate loans. It was far cheaper to buy a smaller competitor than it was to try and expand in a new state or region.
The consolidation continued right on through the internet bubble and collapse and right up until the eve of the credit crisis in late 2007. Consolidation went on a holiday until about 2011 and started right back up where it had left off 34 years earlier.
And it will make you rich if you let it work for you.
Each year somewhere between 3-5% of US banks are taken over, and that’s going to continue until we get below 2000 banks.
Making money off this trend is ridiculously easy, and I’ve got two plays all lined up for you…
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.
As die-hard bank investors, we should be very interested in this seismic shift”…