Bank Stocks Could Get a Boost From a Buyout Binge
Barron's
Apr 22, 2019
Since the financial crisis, regional banks have largely avoided deal-making. But that could be changing, and investors might be warming up to M&A in the sector, too.
Barron’s sat down recently with Gordon Haskett event-driven analyst Don Bilson, who is starting to give these stocks a look. Bilson doesn’t spend time poring over financial statements like traditional Wall Street analysts. Instead, he examines transcripts, proxies, and other arcane documents, searching for catalysts for a corporate event—such as a stock buyback, shareholder activism, or other events that could move a stock.
In the recent past, Bilson hasn’t spent a lot of time looking at banks, because of the lack of deal activity. But the planned merger of BB&T (ticker: BBT) and SunTrust Banks (STI) and the positive market reaction to it are changing the landscape. Now, other regional banks could be in play.
In the past, investors usually shun small banking deals, maybe because investors don’t believe combining banks in disparate geographies generates any real cost savings. Or because most of the capital in banks is intangible—banks are a combination of paper assets and people. There are no physical plants turning out widgets. Whatever the historical reasons, investor reticence was real.
“For a while, what we saw in regional banking was the buyers were getting killed when they were announcing these deals,” Bilson explains.
Fifth Third Bancorp stock (FITB), for instance, dropped 8% when it announced the purchase of MB Financial in May 2018. The stock never recovered, falling 22% for the year—a little worse than the 20% drop in theSPDR S&P Regional Banking ETF (KRE).
But earlier this year, a small regional bank, TCF Financial (TCF), merged with its peer Chemical Financial (CHFC), and investors approved. “On day one, the market liked the idea,” Bilson says. TCF stock jumped 5% the day the deal was announced, and has risen more than 14% year-to-date.
Then came BB&T and SunTrust. When the $60 billion deal was announced, the combined market value of both companies jumped by more than $4 billion, or almost 8%. Investors are no longer scared off by banking mergers.
The problem is there are hundreds of regional banks in America. Picking potential M&A winners could be a challenge. The S&P Regional Banking ETFhas more than 120 banks in it, worth almost $600 billion.
Barron’s took a stab at narrowing the investible universe. Here’s a very simple screen: Four banks worth more than $10 billion and down more than 20% from their 52-week highs. Banks like that could be ripe for a buyout. Our list includes KeyCorp (KEY), SVB Financial (SVB),Regions Financial (RF), and Comerica (CMA).
“Banking deals that are low-premium or no-premium deals, and you’re just kind of resting on synergies, are pretty safe,” adds Bilson. The four on Barron’s list all trade for less than 11 times earnings and a 30% lower than historical averages. There are reasons for why these banks trade inexpensively—like a flat yield curve—but lower valuations make any deal synergies more meaningful.
Predicting M&A is hard. But M&A among regional banks might be the start of a new trend, and investors should be ready for it. At least Barron’s offers a cheat sheet of some banks that could be involved.
Write to Al Root at allen.root@dowjones.com