PNC Buys American Division of BBVA For $11.6 Billion

Matty-Sways

In May, PNC (US's 7th-largest retail bank) sold its 22% stake in BlackRock for $17 billion.

PNC's CEO, Bill Demchak, said he sold the stake in BlackRock because he was concerned about the health of the economy and he wanted the bank to be “bullet-proof” against future bad loans. Fast forward 6 months and Mr Demchak announced PNC would buy the American arm of BBVA, Spain’s second-largest bank, for $11.6bn. Additionally, BBVA said it was in merger talks with Sabadell, Spain’s fifth largest lender.

Retail banking in America increasingly requires scale. It is dominated by four giants (JP Morgan, Bank of America, Wells Fargo, and Citibank in that order) . The pandemic created the perfect storm combined with the Federal Reserve’s low interest rates and it all adds up to regional banks getting hurt the most. (They need the interest income where Wall Street banks earn fees from trading and investment banking).

The merged banks will become the 5th largest bank and add BBVA’s branches in Texas, Alabama, Arizona, California, Colorado, Florida and New Mexico to the bank where PNC’s presence is either puny or non-existent. PNC will now have a coast to coast footprint and be in 29 of the country’s 30 largest markets. PNC’s acquisition of BBVA is the largest banking deal in America since BB&T bought SunTrust for $28bn last year. Analyst believe the purchasing will continue and PNC may target a bank with assets between $50-$250 billion located in the south-west.

Investors were salivating over how the deal will effect BBVA (share price jumped by 20%). 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 capitalization. The sale will shore up its core-capital ratio by nearly three percentage points, to 14.5%. The next question is what will BVAA do with the money from the sale. On November 16th its management hinted that it could eventually be used to buy back shares (Buybacks are banned by euro-area regulators, but may be allowed once again by mid-2021).

Dick Bove of Odeon Capital, a broker, warns that the transaction may not go through and says the price tag was too high anyway. (The Price tag for BBVA’s American franchise amounts to about 30 times 2021 earnings as projected by UBS, posting returns on equity of around 6-7%). However, PNC has demonstrated an ability to make a bad situation good, notably the American arm of RBC, a big Canadian bank, which it snapped up in 2012.

They may also choose to make purchases of their own in Europe because the pandemic is depressing the value of possible targets (Sabadell's shares have fallen by 50% over the past year). Since July the European Central Bank has also encouraged banks to recognize 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.

European banks operating in America should either go big or give up, says Adrian Cighi of Credit Suisse. Analysts expect Europe’s largest bank by assets, HSBC to sell some of its assets in America 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 again.

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