BB&T-SunTrust: 3 big questions

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BB&T finally scored the type of deal it has coveted for nearly two decades — a massive acquisition that puts it one step closer to becoming a top-five bank.

Buying SunTrust will give BB&T Chairman and CEO Kelly King a bank with nearly $450 billion in assets and operations that stretch from Pennsylvania and New Jersey to Florida, then westward to Texas.

At the same time, the $28.2 billion transaction raises a lot of questions for BB&T, SunTrust, other regional banks and regulators. Let’s take a look at some of those.

Why this deal? Why now?

BB&T’s name has come up frequently in speculation about potential "merger of equals" deals, often being paired with Fifth Third Bancorp and Regions Financial.

SunTrust had been viewed as an eventual seller before the financial crisis put an end, at least until Thursday, on gargantuan bank deals. That scuttlebutt often focused on JPMorgan Chase as a prospective buyer, with BB&T, PNC Financial Services Group and Capital One Financial occasionally mentioned.

BB&T and SunTrust touted the opportunity to cut costs and invest heavily in technology as part of the rationale for the deal. In fact, they plan to open a new innovation center in Charlotte, N.C., where the combined company will be based.

This is a continuation of what BB&T has been doing under King for the last two years. BB&T closed 170 branches and cut 632 jobs last year, incurring $75 million in charges in the fourth quarter alone tied to those moves. BB&T is diverting about two-thirds of the savings to fund digital upgrades and other tech projects.

Perhaps King realized he had limited opportunities to cut more costs without the benefit of a large acquisition. It is possible that William Rogers, SunTrust’s CEO, had the same thought.

Other factors could be the rise of fintech and other disruptors. Meanwhile, JPMorgan Chase and Bank of America pour billions of dollars into digital-only platforms and other technology. One must also consider the rising rate environment and the banking industry’s admitted challenges boosting revenue.

Another contributor could be the regulatory climate.

On one hand, BB&T and SunTrust were both getting close to $250 billion in assets, where they would be subject to a liquidity coverage ratio that would have required each to hold high-quality assets that could easily be turned into cash.

“By choosing to define their own fate — not let the Fed do it for them — BB&T and SunTrust are redefining U.S. regional banking," said Karen Shaw Petrou, managing partner of Federal Financial Analytics.

Another view is that, with a new regulatory regime, agencies might look more favorably on mega bank deals.

BB&T is in the final stages of resolving a Federal Reserve order for Bank Secrecy Act compliance, so it could be assumed that King had meaningful discussions with his regulators before pursuing SunTrust. The banks also believe they can close the deal by the end of this year — an ambitious timeline given how long other deals have idled while awaiting regulatory approval.

What does this mean for other regionals?

This will be a topic of conversation for weeks, if not months.

There are five banks ahead of the new BB&T: JPMorgan Chase, Bank of America, Citigroup, Wells Fargo and U.S. Bancorp. It is hard to imagine many of those pursuing a deal, though U.S. Bancorp stands out as a possbility.

SunTrust would have given U.S. Bancorp an immediate lift in the Southeast. Will Andy Cecere look at other options with SunTrust off the table?

Other regionals will likely do some soul-searching.

Fifth Third, which has a pending deal for MB Financial, and KeyCorp, which bought First Niagara in 2016, are in the middle of handling large deals.

What about Regions? PNC? Citizens Financial Group? Or Canadian banks like TD Bank? Will today’s deal given them the motivation, or sense of urgency, to pursue deals once viewed as purely theoretical?

There could also be an opportunity for smaller regionals as well. Pay attention to Comerica in coming months. Things could also get interesting for Synovus Financial, which just completed a large acquisition. First Horizon National is also worth watching.

Community banks also have a chance to benefit. BB&T and SunTrust plan to divest $1.4 billion in deposits. Those types of deals tend to get snapped up by smaller institutions.

The competitive landscape is changing, and it could evolve at an accelerated rate now that BB&T has taken the initiative.

Will this deal work?

While the companies are billing this as a merger of equals, BB&T is clearly the buyer. It will own nearly 60% of the combined company.

They are looking to give a sense of partnership elsewhere — appointment of equal numbers of directors and top-tier executives from each side; plans to pick a new name; and the selection of a (more or less) neutral site for the headquarters. Also, Rogers is set to eventually succeed King as CEO.

Regardless of the nomenclature or structure, most merger-of-equals-type deals struggle.

BB&T, to its credit, has experience in this arena. The bank was created in the mid-1990s because of a merger of equals. Kelly King and his predecessor, John Allison, have completed and integrated hundreds of deals.

Still, the biggest deal BB&T has completed was its $2.5 billion purchase of Susquehanna Bancshares. That institution was only a tenth of BB&T’s size when that acquisition was announced in late 2014.

Then there are cultural concerns.

For now, analysts seem confident that BB&T can pull off the deal, at least from a cultural perspective.

“BB&T is an excellent partner when it comes to ‘all cards on the table’ with respect to the important social issues,” Chris Marinac at FIG Partners wrote in his note to clients. “In our experience not every merger partner has the same level of integrity. BB&T is highly likely to perform well here.”

No one will really know, however, until these teams start to work more closely and the completion date nears. Integration will create even more challenges.

Will other regional banks be able to poach lenders and customers? You know they will try.

Bottom line: Things got really interesting, really fast in 2019.

Bankshot is American Banker's column for real-time analysis.

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M&A Regional banks Consumer banking Commercial banking Deposits Fintech Kelly King William Rogers, Jr BB&T SunTrust