By Nathan Stovall, SNL Financial staff writer
Big bank M&A is making progress and marching along, albeit slowly.
BB&T Corp. put another $1 billion-plus deal on the tape recently, unveiling plans to purchase National Penn Bancshares Inc. for $1.8 billion.
The deal, announced Aug. 17, marked only the eighth bank deal with a value over $1 billion announced since 2012 and just the 14th deal that large since 2009. In 2006 alone, 13 deals exceeded that value, according to SNL data.
Still, the BB&T/National Penn deal came shortly after two of the larger bank deals announced since the crisis received regulatory approval and closed, with BB&T and CIT Group Inc. completing their respective multibillion-dollar acquisitions of Susquehanna Bancshares Inc. and IMB HoldCo LLC, the parent company of OneWest Bank NA.
Analysts’ cautious view
Following the news of BB&T's latest deal, the RBC Financials Equity Team said they expected M&A activity to continue increasing in the next 12 to 24 months due to strong buyer stock currency, a persistent low interest rate environment, and higher regulatory-related expenses.
The analysts, however, believe deal activity will remain concentrated in the "small- to mid-cap" bank space and larger deals might not occur for another year or more.
"Large banks (those that fall under CCAR guidelines) acquiring other CCAR banks, however, will most likely not occur until late 2016 or 2017 due to continued heightened regulatory scrutiny," the analysts wrote in an Aug. 20 report. "By the end of next year, many of the CCAR banks will have addressed one of the primary regulatory issues, BSA/AML compliance, that is holding back transactions, in our opinion."
Clearly, if the recent volatility in the markets persists, bank M&A could be challenged in the near term.
Even without the recent turmoil in the markets, other analysts noted in the aftermath of National Penn's plans to sell that the prospect of further big bank deals surfacing remained uncertain. Sandler O'Neill analyst Frank Schiraldi said he was surprised by the timing of National Penn's sale, but noted that the transaction represented proof that investors should consider banks approaching the key $10 billion asset threshold as both possible buyers and sellers.
Any bank that crosses the $10 billion mark is forced to undergo regular stress testing, lose income from the impact of the Durbin amendment, and face additional oversight from the Consumer Financial Protection Bureau and higher deposit insurance assessment fees. All of those factors hinder an institution's profitability, making the decision to cross the $10 billion mark a key consideration for bank management teams.
"That said larger bank M&A still seems a bit unproven in that only a select few seem to be able to pull it off in the current regulatory environment," Schiraldi wrote in an Aug. 20 report.
Enjoying somewhat different status
BB&T does seem to be one of the few "chosen" large banks that can pursue M&A and has telegraphed its plans to do deals for the last few years. While BB&T said the planned purchase of National Penn came together in the last 60 to 90 days, the transaction began with a pre-existing relationship between the seller's President and CEO Scott Fainor and BB&T Chairman, President and CEO Kelly King, according to Sandler O'Neill & Partners Principal Emmett Daly.
Daly, who advised National Penn in the deal, said Fainor and King are both members of the Federal Reserve Board of Governors' Federal Advisory Council.
BB&T could look to capitalize on other relationships, saying it would take a six- to 12-month break from M&A, but does plan to pursue other acquisitions. Future deals could prove to be quite sizable to move the needle for BB&T, which had $191.02 billion in assets at the end of the second quarter.
BB&T's interest in further bank deals is not necessarily the norm among larger banks. Few other large regional banks with the wherewithal to ink such large acquisitions have expressed an interest in pursuing bank deals. For instance, during their recent earnings conference calls, the only CCAR bank we could find that expressed interest in pursuing a bank deal was BB&T.
Big banks face stumbling blocks
Even if a bank is hunting for deals, any potential buyer could face regulatory roadblocks.
M&T Bank Corp. has delayed its purchase of Hudson City Bancorp Inc. for years due to regulatory concerns over compliance with the Bank Secrecy Act and anti-money laundering provisions.
More recently, BancorpSouth Inc. has delayed two pending acquisitions due to regulatory issues first around BSA/AML compliance and then over concerns cited by the CFPB over fair lending.
Executives at BancorpSouth say they have struggled to understand the CFPB's expectations.
Regulatory pressure surrounding bank M&A is unlikely to ease, according to Keefe Bruyette & Woods bank analysts. The analyst team noted in a report last month that regulatory scrutiny has served as a headwind to bank M&A and increasing political pressure on regulators to be more thorough when considering merger applications has weighed on banks' ability to successfully close deals in a timely manner.
"Furthermore, increased focus on the Bank Secrecy Act/Anti-Money Laundering law (BSA/AML) and also fair lending practices have been some of the most common issues we have seen to date, and given recent political rhetoric we do not believe the regulatory environment for bank M&A is likely to ease up any time soon," the analysts wrote in early July.
Eyes on BB&T and RBC deals
The Street will pay attention to the completion date of the BB&T/National Penn deal and another large deal announced earlier this year—Royal Bank of Canada's planned $5.4 billion purchase of City National Corp.—to see just how difficult it is to close big deals. That acquisition remains pending and has been subject to an inquiry by the Federal Reserve over RBC's alleged collaboration with City National in extending credit to a City National client.
If the RBC/City National deal can close in a timely manner, that could spell good things for other institutions looking to acquire larger regional players. The dam holding back large deals, though, does not seem imminently poised to break open.
Nathan Stovall is a senior editor and columnist with SNL Financial. The views and opinions expressed in this piece are those of the author and do not necessarily represent the views of SNL.