May 13, 2021

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Pandemic pressures are pushing US banks towards consolidation

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The pressures of the pandemic and the warm welcome from investors to the recent acquisitions has increased the appetite of mid-sized US banks for more deals like those of last week. Sale of $ 7.6 billion from People’s United Financial to M&T Bank, according to traders and industry analysts.

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

“Everyone wants to make a deal,” said a seasoned negotiator who advises banks and other financial groups. “It’s the difference now with the past.”

Bankers warn that not all potential trades will be easy to execute. HSBC, which confirmed this month that it plans to sell its 150-branch U.S. retail bank, may simply end the transaction, a company insider said.

But the pandemic has highlighted the advantages of size in the bank. With the closing of branches or the reluctance of customers to visit them, digital banking has become more important, pushing banks to invest.

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

“Any bank that sits below the top four or five, especially in retail banking, needs to ask themselves some very serious strategic questions,” said a senior official at a mid-sized US bank. “It’s not foreign or national, it’s a question of scale.”

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

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

“When it comes to banking transactions, the market tends to be cyclical – they like transactions or they don’t like transactions,” Rodgin Cohen, lawyer and Wall Street banking advisor. “Starting with the enthusiastic response to the early citizens, the market has been quite receptive.”

Scott Siefers, analyst at Piper Sandler, said banks’ appetite for transactions has also improved over the past six months because “the credit cycle is kind of melting” and banks no longer fear unknown loan losses linked to Covid in their books or the books of rivals.

One factor that could hold back banking transactions is that several large players digest recent acquisitions – and regulators balk at simultaneous acquisitions because they carry operational risks. For this reason, PNC, M&T and Huntington, which announced a $ 5.9 billion deal to buy TCF Financial last year, are indeed out of the game for the next several years.

“I don’t think we’re going to see a windfall, but I don’t think it will get back to the point where it’s one or two trades per year either,” the seasoned financial trader said.

Major Canadian banks, which have a significant presence in the United States, are considered more likely acquirers.

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

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

However, a person familiar with HSBC’s business said it could prove to be a tough sell because of the way its costs relate to its parent company, which makes it difficult to assess, and because it does not have a unique selling proposition once it is removed from the HSBC global market. network.

HSBC also has a smaller universe of potential buyers as foreign banks tend to favor cash transactions, rather than receiving shares of the acquiring company, which they should hold during a blocking period and whose value could fluctuate.

PNC was able to pay cash for BBVA because she had $ 17 billion war chest by selling its stake in asset manager BlackRock last summer. M&T also paid cash for People’s. Such transactions are rare, bankers say, because acquiring banks typically don’t have a lot of cash on their balance sheets.

Shareholders in US banks would have no qualms about accepting shares as payment, and their management might have a hard time refusing the offers.

“The vaccine is out there, there is a big fiscal stimulus plan, there are massive monetary accommodations,” said a financial sector negotiator. “A year ago there were very good excuses not to do something. These exogenous factors have really disappeared. “



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