Sizable bank mergers were supposed to be no-brainers as lenders - weighed down by a sluggish lending environment, overlapping branch networks, and high regulatory costs - sought operating synergies. Unfortunately, regulators since the financial crisis have had different ideas about what banks should be doing with their capital (namely, storing it for a rainy day).
The M&T/Hudson City merger finally getting approval (after a three-year delay), along with quick green lights for a couple of BB&T purchases began to give investors hope, and this week they got KeyCorp (NYSE:KEY) agreeing to buy First Niagara (NASDAQ:FNFG), and New York Community Bancorp's (NYSE:NYCB) deal for Astoria Financial (NYSE:AF).
The reaction: KeyCorp is lower by more than 10% since the news was announced, and First Niagara by more than 6%; NYCB is off nearly 14%, and Astoria 11%.
"This level of selloff is not typical," says Sterne Agee's Peter Winter. "Early reactions to bank transactions often are bumpy," says KeyCorp CEO Beth Mooney.
CLSA's Mike Mayo calls Key's purchase "strategically good," but isn't a fan of the bank's plan to fund a major portion of the deal with stock. NYCB is also funding much of its buy with stock, and the deal includes a cut in the dividend - maybe not the greatest move considering the income-oriented lean of the bank's investor base, says Winter.
The OCC yesterday gave the green light to CIT Group's $3.4B purchase of OneWest Financial, and earlier this month regulators approved BB&T's $2.5B acquisition of Susquehanna Bancshares.
Possibly lifted now is concern nearly any sizable deal would get nixed (or delayed to death) by D.C. a la M&T's attempt to purchase Hudson City Bancorp (originally announced three years ago).
Both the CIT and BB&T deals, however, were approved within a year of their announcement, maybe making the M&T/Hudson experience the outlier rather than the norm.
While it still appears unlikely much bigger deals could win approval, the path could be clear for smaller-to-medium sized lenders to do business. Drexel Hamilton's David Hilder believes the CIT approval is a "positive catalyst" for acquisitions of lenders with up to $25B in assets.
Regulatory headwinds in banking are "plateauing," says BB&T (BBT -2.5%) chief Kelly King, appearing on CNBC after his bank's agreement to purchase Susquehanna Bancorp (SUSQ +32.1%) for about $2.5B. The issues being talked about today are quickly become yesterday's news, he says.
Speaking with analysts/investors on a conference call, King says the two lenders had been in talks for several months. One wonders if the deal's announcement one week after last week's Republican landslide is just a coincidence.
BB&T, says King, is very interested in other opportunities, but naturally the price has to be right. Texas? Not interested, he says, as those lenders are asking 2x-3x book (SUSQ looks like it's being purchased for about 1.7x tangible book).
A move further up the East coast? King says BB&T could eventually move into NYC and Boston, but for now will focus on the Mid-Atlantic and Southeast.
Possibly helping to push Susquehanna into a sale (and no doubt on the minds of other smaller lenders) are the compliance costs associated with the Bank Secrecy Act and Anti-Money Laundering rules, and King notes SUSQ can now fold those costs into BB&T's.