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Pole vault

14 Dec 2020 By John Foley

It’s reasonable to be skeptical when companies announce big merger plans. Sometimes, as with Huntington Bancshares’ $6 billion acquisition of smaller regional lender TCF Financial, the skepticism is overdone. Bank mergers in the United States are a trend that investors, as well as customers, ought to like.

Huntington and TCF, with branches across the Midwest, plan to form a single lender with $117 billion of loans and an $18.5 billion market capitalization based on their stock prices at Friday’s close. Factor in cost savings of $490 million a year and the new firm ought to have a theoretical value of around $23 billion. Instead, by the end of Monday the two combined were worth a little less than where they started. While the target’s shares rose 6%, Huntington’s fell 3.5%.

On paper, that underappreciates the deal. The potential savings from crunching together overlapping networks of bank branches are sizable. Huntington thinks it can extract just over one-third of TCF’s non-interest costs, which is pretty similar to other bank deals including PNC Financial’s recent purchase of Spanish lender BBVA’s U.S. business. Investors on Monday were giving the companies no credit for that.

There are two reasons why. Since the financial crisis more than a decade ago, investors have focused on what happens to tangible book value per share, a number that, in a crunch, can become a yardstick for what institutions are worth. Huntington’s tangible book value per share will fall after buying TCF. Banks that have avoided that outcome – like CIT, which announced a merger with First Citizens BancShares in October, or BB&T, whose combination with SunTrust closed last year, have seen their shares rise. But they are in the minority.

The other is that some of the hefty savings may end up getting competed away rather than helping shareholders. But that’s exactly why mergers are beneficial. America has over 5,000 lenders, but the biggest four – JPMorgan, Bank of America, Wells Fargo and Citigroup – hold around one-third of all the country’s deposits, according to their filings and Federal Reserve data. Deals that strengthen middle-market banks to better compete with the top echelons should be good for customers, for the lenders themselves, and ultimately for their owners. For now, investors seem hard to convince.

 

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