Merge On: The Rise of an All-American Banking Giant

EDITOR’S NOTE: This article was originally published as part of the Spring 2019 magazine.

After over a decade-long drought in bank merger deals, the proposed BB&T-SunTrust merger deal would be the largest banking deal since the onslaught of the financial crisis (Source 5). BB&T and SunTrust are both regional banks with a dominant presence in the southeastern United States. The deal is touted to be a “merger of equals,” with BB&T owning 57 percent of the combined company and SunTrust owning 43 percent in an all-stock deal worth a combined $66 billion (Source 1). The deal is set to finalize in the fourth quarter this year. The new firm, whose name is unknown, will effectively become the sixth-largest US-based bank, with over $442 billion in assets (Source 1). This will mark the largest bank merger since JPMorgan’s purchase of Bank One Corp in 2004 (Source 3). Such a historic event raises questions about the incentives for the deal, implications for the financial services industry, and possible economic consequences.

The proposed merger is a result of the intense competition in technology and spending power among entities in the financial services industry. This competition is not restricted to the traditional big banks such as JP Morgan Chase, Bank of America, and Wells Fargo. New financial technology (“fintech”) startups and non-traditional banking entities are posing challenges to regional banks in digital interfaces and deposits (Source 6). Mr. Kelly King, the CEO of BB&T, acknowledged that “technology was the main impetus for the deal.” Large banks are currently squeezing regional banks in their efforts to bring cutting edge technology to customers. JPMorgan Chase, for example, invested over $10.8 billion in technology last year. BB&T and SunTrust recognize that merging would enable large-scale investments in innovation to offer better digital services in the hope of attracting more customers (Source 6). Both companies have recognized the pivotal roles that secure digital systems and an up-to-date digital presence play in maintaining an edge in the financial industry. Large banks such as JP Morgan Chase and Bank of America have created sophisticated digital offerings that have attracted more customers to open checking accounts with those firms. Furthermore, they have larger branch networks which permit a wider customer base (Source 3). These factors have contributed to an overall decline in the amount of US deposits in regional banks. This is significant because banks are heavily reliant upon deposits for their spending power and eventual profitability. Currently, the three largest banks have a combined $118 billion in deposits which dwarfs the $55 billion total of the two dozen regional banks. This sharp divide exemplifies the benefits that the large banks have accrued through investing in technology. Both BB&T and SunTrust have recognized the need to merge as a means of adaptation in competition with big-banks before succumbing to the declining deposit rates that afflict many regional banks.

Since the Great Recession, there have been a series of new financial regulations to improve financial stability. In 2018, the Republican-led Congress passed legislation that eased financial regulations and reduced oversight for banks with assets under $250 billion. Banks with over $50 billion in assets were previously termed “systematically important financial institutions” or “SIFI banks” and were subject to extra regulatory burdens. While both BB&T and SunTrust are no longer SIFI banks, they are quickly approaching the $250 billion limit on their own (Source 6). Thus, the merger only hastens the inevitable in classifying the new company as a SIFI bank. The current regulatory landscape provides unique benefits for the merger. The Federal Reserve has proposed a liquidity-rule change to reduce the amount of liquidity that big banks will need (Source 3). While big banks such as JP Morgan, Bank of America, and Wells Fargo cannot buy another sizable bank, they have actively bought fintech companies to maintain their edge. The Federal Reserve has reported that it will take a close look at the merger, but the current regulatory environment seems unlikely to hinder its success (Source 3).

While BB&T and SunTrust have their headquarters in Winston-Salem, North Carolina and Atlanta, Georgia, respectively, the new company will set up shop in Charlotte, North Carolina. A spokesperson for SunTrust has reported that it will retain significant operations in Atlanta including retaining its investment banking division and creating a new wholesale banking center (Source 4). This drastic change comes as a boon to Charlotte as it becomes the “Wall Street of the South,” counting amount its residents Bank of America and Wells Fargo’s East Coast center in addition to the new company (Source 7). BB&T expects that the new company will save $1.6 billion in cost-cutting measures after a combination of much-needed branch closures, back-office consolidation, and systems integration (Source 5). This deal provides several meaningful opportunities for both companies to have a bright future amid dynamic changes in the financial sector and overall economy. With Wall Street looking upon the merger deal with immense optimism, time will tell whether the regulatory and economic frameworks that permit the merger’s success will prove to sustain long-term economic growth and resilience in the financial services industry.

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https://www.tampabay.com/business/what-tampa-bay-area-customers-can-expect-as-suntrust-and-bbampt-merge-20190215/

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