Susquehanna Bancshares Inc (SUSQ)

[Enterprising Investor]

BB&T Deal Doesn’t Open Bank Merger Floodgates

Susquehanna Purchase Was Spurred by Unique Conditions

By John Carney

When it comes to BB&T ’s acquisition of Susquehanna Bancshares , think rogue wave rather than tidal shift.

Bank-merger activity is on the rise. But nearly all of the deals over the past five years have been among banks with less than $1 billion in assets. Many of those appear to be driven by rising regulatory costs pushing smaller banks to consolidate to achieve efficiencies of scale.

Larger banks haven’t been major players in deal-making. The main roadblock: the idea that regulators don’t want to see the biggest banks getting bigger. Valuations also play a role: When banks believe their shares are undervalued, they hesitate to use stock as acquisition currency, while potential sellers are more likely to resist offers.

The Susquehanna acquisition shouldn’t be taken as a sea change. For starters, BB&T chief Kelly King has been uniquely vocal about his view that regulators would approve acquisitions by his bank. He even seemed to telegraph something like this deal earlier in the year, saying the “sweet spot” for BB&T would be a bank with assets between $10 billion and $20 billion. Susquehanna has around $18.6 billion in assets.

This willingness to acquire may be driven by where BB&T falls in the new regulatory schema. It is large enough, with assets of $181 billion, that it must undergo Federal Reserve stress tests. Yet it remains small enough that it can grow a bit further without getting caught up in the too-big-to-fail net of even stricter scrutiny. So tacking on even tens of billions of dollars more of assets won’t raise regulatory costs—and it spreads them across a wider asset base.

That suggests a limit to BB&T’s appetite for buying banks. Combined with Susquehanna, BB&T will have around $200 billion in assets, drawing it close to the $250 billion line that triggers more conservative risk-weighting of assets, stricter liquidity requirements, and additional leverage limits. BB&T won’t likely get too close to that line.

And then there is Susquehanna’s particular financial position. It had recently reduced its loan-to-deposit ratio to 98.56% from 105.5% at the end of 2013—but this is still high compared with peers. BB&T’s large and growing base of low-cost deposits and its lower loan-to-deposit ratio—around 91%—mean it can alleviate pressure on Susquehanna’s ability to grow its loan book less expensively than Susquehanna could on its own.

Susquehanna shares were also trading at a lower multiple of tangible book value than any bank in its peer group. What’s more, that multiple has been in decline of late. That may have made management more open to an acquisition as hopes of higher valuations faded. From BB&T’s perspective, it meant it was able to offer a 39% premium to Susquehanna’s share price before the deal was announced and still pay a multiple that is less than its own.

This makes the deal somewhat unique for BB&T. Investors shouldn’t expect a rising tide of acquisitions to lift shares of other potential targets.

Write to John Carney at [e-mail]

http://online.wsj.com/articles/bb-t-deal-doesnt-open-bank-merger-floodgates-1415830007