PNC’s $11.6bn Acquisition of BBVA USA Bancshares
By: Dylan Morris, Diego Zuloaga Prado, Shivam Gujral, Manasvi Tyagi
Overview of the deal
On November 16th, The PNC Financial Services Group announced the all-cash $11.6 billion acquisition of BBVA’s USA Bancshares, excluding Propel Venture Partners and BBVA Securities. The deal, which is among the largest since the 2008 crisis, would result in the creation of the fifth-largest US retail bank with $560 billion in assets. The purchase is estimated at 134% of BBVA USA’s tangible book value (based on the balance sheet of September 30th, 2020)
On the other hand, BBVA’s struggle to consolidate its position and the absence of key competitive advantages in the US market make this a very positive deal for the Spanish Bank. The bank has stated that the transaction shows their strong financial situation and represents a great opportunity to create value for their shareholders through dividends or divestments. Therefore, we can expect a relocation into the Spanish domestic market, even though the merger talks with Sabadell have reached no agreement. BBVA will continue its Corporate and Investment Banking operations through the New York Subsidiary.
Acquirer Details: The PNC Financial Services Group
PNC is a financial holding company that provides different financial services divided across its different segments: Retail Banking, Corporate & Institutional Banking and Asset Management Group. Retail Banking is focused on consumers and small businesses, providing them deposit, lending, brokerage, investment management and cash management products and services. Corporate & Institutional Banking provides lending, treasury management, capital markets and international services in the middle market, where it has been in the top five syndicators of market loans for the last 5 years. Finally, the Asset Management Group provides asset management services to corporations, government entities and affluent and ultra-affluent individuals and families.
Founded in 1845, headquartered in Pittsburgh, USA
CEO: William Demchak
Number of employees: 50,020
Market cap: $59.4 billion (as of November 25th, 2020)
LTM Revenue: $18.183 billion
ROE (2019): 10.9%
Target Details: BBVA USA Bancshares, Inc.
BBVA USA Bancshares is a Sunbelt-based bank holding company founded in 2007 after BBVA’s acquisition of Compass Bancshares. It provides commercial and retail services through BBVA USA, operating in 637 branches across Texas, Alabama, Florida, Arizona California, Colorado and New Mexico. It accounts for around 13% of the Gross Income of the Spanish bank and is one of the leading small business lenders in the US, ranking 6th in number of SBA loans in 2017.
Founded in 2007, headquartered in Houston, Texas
CEO: Javier Rodríguez Soler
Number of employees: 9,660
LTM Revenue: $3.76 billion
Assets: $104 billion
Total equity: $10.379 billion
ROE (2019): 4.91%
Seller Details: BBVA
BBVA is the second largest Spanish financial entity. The bank provides a wide range of services to corporations, government entities, financial institutions and individuals with a strong presence in Europe, Turkey and South America. In addition, BBVA is the largest financial institution in Mexico.
Founded in 1857, headquartered in Bilbao and Madrid, Spain
CEO: Onur Genç
Number of employees: 124,110
Market cap: $29.862 billion (as of November 26th, 2020)
LTM Revenue: $20.273 billion
ROE (2019): 11.9%
Exploring the Deal Rationale, it is essential to consider 2 important aspects: benefits to the acquirer including the merged entity as well as the advantages of the merged entity.
Interestingly, this deal comes around 6 months after PNC sold its stake in BlackRock for $17bn due to concerns over the future of the US Economy amidst the COVID-19 pandemic. The sum PNC paid for BBVA’s US operations matches the after-tax proceeds of the BlackRock sale, making it seem a quite long term plan for the company, which was further proven true as PNC’s CEO Bill Demchak characterized the 2 deals as ‘substitution’.
"Our acquisition of BBVA USA will accelerate our growth trajectory and drive long-term shareholder value through a strategic deployment of the proceeds from the sale of our BlackRock investment." stated William Demchak, CEO of PNC.
PNC wants to further establish its presence in the US Metropolitan Statistical Areas including areas like Texas, Arizona and California, where BBVA has a strong presence. This merger will allow the new PNC to have a presence, not only a branch presence, but also Mid-Market Expansion and commercial/private client offices in 29 out of 30 of the Metropolitan US states, leaving out Las Vegas. Another fact pointed out by their CEO, Mr. Demchak was that they would be able to use BBVA’s US-based capital, bring operation to scale, which is something BBVA was unable to do.
BBVA, on the other hand, intends to do a buyback with the cash considerations received from a purchase price, representing 20 times the 2019 earnings and almost 50% of BBVA’s overall market capitalization. BBVA’s Executive Chairman commented on this merger, saying “this deal enhances our already strong financial position, we will have ample flexibility to profitably deploy capital in our markets and strengthen our long term growth profiles”
The US retail banking industry is largely dominated by four main players: JP Morgan Chase, Bank of America, Wells Fargo and Citigroup. Each of the top 4 banks have over $2 trillion in assets under management (AUM) compared to PNC Bank’s $450 billion AUM.
In the short-term, the deal will increase PNC Bank’s AUM to $560 billion, making it the fifth-largest US bank by assets under management. This is still a long way off the $2 trillion AUM of the top 4 but it’s certainly a step in the right direction and one which will allow PNC Bank to compete in states where it had a relatively low presence before the merger. BBVA has a strong presence in states such as Florida and California so if this deal went through it would allow PNC Bank to build its presence in those areas and target a larger client base. This idea of being able to access BBVA’s client base doesn’t just apply to the assets they hold but also to PNC Bank’s larger product offering and how they might be able to sell some of those products to their new clients.
In terms of the financial advantages of the deal, PNC expects 21% EPS accretion in the second year after the deal though it is worth noting that the merger will initially be dilutive to the firm’s tangible book value per share. This EPS accretion is largely down to the cost synergies available to PNC Bank. By 2022, which is when the deal is expected to become accretive to EPS, they expect to be able to cut 35% of BBVA’s US expense base which amounts to roughly €161 million in savings.
The final short-term implication which is interesting to consider is the effect of the sale on BBVA and their aforementioned buyback plans.
“We have been pretty smart at capitalising on a very rare, unique opportunity of having a strategic purchaser with cash in hand. The intention is clearly to do a sizeable buyback,” said Onur Genç, BBVA chief executive.
However, the European Central Bank (ECB) ordered all eurozone banks to stop all dividends and share buybacks in March, in light of the Covid-19 pandemic. This is expected to be lifted in 2021 so if BBVA were willing to wait then a share buyback remains an option and certainly seems to be something they’re keen to do.
This deal highlights the slow, but noticeable consolidation of the US market. BBVA is among a number of European banks that have made moves to withdraw from the US, including Deutsche Bank and HSBC (though both of these firms made the majority of cuts within investment banking), after struggling to compete with larger, better-capitalised rivals. For PNC, the acquisition is a step towards their aim of “building the national franchise” (Demchak). BBVA’s operations in Texas are of particular interest, given that the state has the fastest-growing population in the country.
Increasingly, scale is necessary for banks to succeed in the USA and cut costs. Though the transaction gives PNC plenty of scope to grow organically in markets like California and Washington, looking forward, as the industry consolidation continues, the firm could seek further growth through acquisition, in which case there is no shortage of potential mid-sized US targets.
The Spanish banking industry is facing a similar round of consolidation, though at a much faster pace. Having grappled with negative interest rates for years, and now a likely wave of loan losses to come, Spanish banks are looking towards growth to survive. The sale of BBVA’s US operations would give the bank the necessary capital they need to explore potential acquisitions, as we have already seen in their (failed) talks with Sabadell. It’s possible that BBVA may look outside of Spain to fuel their expansion, with some suggesting that the bank should target countries without negative rates and buy the rest of their operations in Turkey. Whatever the next move of BBVA is, it’s clear that the flurry of activity within the Spanish banking market is likely to shape the European industry as a whole.
Risks and uncertainties
It’s unlikely that there will be a struggle for regulatory approval. The combined entity will still be dwarfed by the 4 dominant players in the US banking industry. Furthermore, the deal is expected to increase BBVA’s core equity tier one ratio by around 300 basis points, enhancing their financial strength in the eyes of regulators.
However, it’s questionable whether the price tag put on BBVA US is justified. The $11.6 billion valuation is 2.5 times the average valuation analysts gave the business, and represents almost 50% of BBVA’s market cap as a whole. For a business that generated less than 10% of BBVA’s FY2019 net attributable profit, this is a generous valuation. Furthermore, after Q3 2019, non-performing loans made up 2% of BBVA USA’s total loans- a high figure for the industry.
PNC clearly views the business in a different light, believing that they can drastically cut costs and generate aggressive growth. Overall, the transaction is expected to create $900m in cost synergies, largely due to compliance savings and overlap of management. There is little doubt that PNC can deliver on this though, given their successful acquisition of RBC’s US operations- 90% of planned cost savings were achieved within a year of the deal. PNC has experience buying numerous other underperforming banks, so it’s unlikely that integration will be a major difficulty either.