BACK IN MAY PNC, America’s seventh-largest retail bank, sold its 22% stake in BlackRock, the world’s largest asset manager, for $17bn. Bill Demchak, its boss, said at the time that worries about the health of the economy had prompted it to divest, in order to “bullet-proof” its balance-sheet against future bad loans. Six months on, Mr Demchak seems to have decided to break cover. On November 16th PNC announced it would buy the American arm of BBVA, Spain’s second-largest bank, for $11.6bn. The deal may well precipitate a scramble for scale on both sides of the Atlantic: the same day BBVA said it was in merger talks with Sabadell, Spain’s fifth largest lender.
Mr Demchak says the deal was made easier by last week’s news on an effective covid-19 vaccine, post-election stability in America and robust policy responses to the crisis. But its raison d’être is more profound. Retail banking in America increasingly requires scale. It is dominated by four giants, which have muscled in on branches in recent years while lavishing hundreds of millions of dollars on marketing and technology. That spending on digital banking has paid off during the pandemic, as flashy apps have attracted a growing share of deposits. At the same time, the Federal Reserve’s low interest rates are squeezing lending margins. That hurts regional banks the most: these rely more on interest income from loans than their Wall Street rivals, which also earn fees from trading and investment banking.
PNC’s acquisition of BBVA is the largest banking deal in America since BB&T bought SunTrust for $28bn last year. The resulting entity will be the country’s fifth-largest retail bank (see chart). The geographic overlap between the two banks’ branch networks, and associated cost savings, is relatively small. Half of BBVA’s branches are in Texas, and the rest span Alabama, Arizona, California, Colorado, Florida and New Mexico. PNC’s presence in all of these markets is either puny or non-existent. Instead the acquisition will create a coast-to-coast franchise. The combined entity will have a footprint in 29 of the country’s 30 largest markets.
But PNC is unlikely to stop there. It has excess capital to deploy, in part because regulators have capped dividends and banned share buybacks. And America’s field of mid-sized banks remains crowded. At least 30 lenders have assets in the region of $50bn-250bn. PNC may target one of them to expand further, notably in the country’s south-west.
The BBVA deal carries political risk. The Biden administration will not like mergers that create big banks, says Dick Bove of Odeon Capital, a broker, in a research note; he warns that the transaction may not go through. Moreover, the price tag on BBVA’s American franchise amounts to about 30 times 2021 earnings as projected by UBS, a bank. That is a lot for a unit that has long underperformed, posting returns on equity of around 6-7% (BBVA’s Mexican arm, which consumes about as much in risk-weighted assets, routinely produces returns of 20% or more). But PNC has demonstrated a knack for turning around ailing ventures, notably the American arm of RBC, a big Canadian bank, which it snapped up in 2012. Investors seem confident it can repeat the trick: PNC’s share price was up by 4% in pre-market trading.
Investors were even more enthusiastic about what the deal means for BBVA. Its share price jumped by 20% on the day. The earnings it gives up will be more than compensated for by the capital it gets back. Britta Schmidt of Autonomous, a research firm, estimates the net value gained at about €8bn ($9.5bn), or 40% of the bank’s market capitalisation.
The question is what it decides to do with the bounty. The sale will shore up its core-capital ratio by nearly three percentage points, to 14.5%—well above the level demanded by regulators. Some will undoubtedly be retained to permanently boost the ratio, which some analysts thought low compared with other lenders. On November 16th its management hinted that a chunk may also be used eventually to buy back shares, which, today’s bump notwithstanding, are trading at prices close to historically low levels. Buybacks are banned by euro-area regulators, but may be allowed once again by mid-2021, when the deal is expected to close.
But the biggest chunk may go towards acquisitions on its home turf, fuelling a long-awaited wave of consolidation in Europe’s overbanked markets. It might help that the rises in bad debt that are expected as a result of the pandemic are depressing the value of possible targets: the price of Sabadell’s shares has fallen by more than half over the past year. Since July the European Central Bank has also encouraged banks to recognise an accounting gain, known as negative goodwill, which they generate when they buy a rival at a lower price than the book value of its assets, says Johann Scholtz of Morningstar, a research firm. Such “badwill”, in turn, can be used to offset restructuring charges. And BBVA has another reason to invest at home. Its exit from America makes its portfolio disproportionately exposed to emerging markets. Investors seem to believe its talks with Sabadell will succeed: its share price jumped by 16% on the PNC news, before rising by another 9% after the two banks confirmed due diligence had begun.
Transatlantic divestitures, meanwhile, will probably continue. European banks operating in America should either go big or give up, says Adrian Cighi of Credit Suisse, a bank. Analysts expect at least a partial exit by HSBC, Europe’s largest bank by assets, when it releases its annual results in February. For now Santander and BNP Paribas, the other two banks with a big American presence, say they do not want to sell. The PNC deal, however, might make shareholders think focus is not such a bad idea.
A Global Asset Management Seoul Korea Magazine