BBVA, PNC Strike A Win-Win Deal For BBVA's US Operations

It was no secret that PNC Financial (PNC) intended to put its large excess capital position to work through whole bank M&A, and it was likewise no secret that BBVA (BBVA) management was willing to listen to offers for its U.S. subsidiary. Those two realities intersected on Monday with the announcement that the companies had reached an agreement whereby PNC will acquire the U.S. branch banking assets of BBVA (BBVA USA) in an $11.6 billion deal that should close at some point in 2021.

I do believe this is a win-win opportunity for both banks, though moreso for PNC. BBVA is getting a good price on an asset that it frankly wasn’t running to its full potential, and management can deploy that capital toward dividends/buybacks or its own M&A activities. For PNC, the deal makes it a truly national bank with strong footholds in markets like Houston and Denver, as well as growth opportunities in states like Arizona and California, and likewise provides some meaningful self-improvement opportunities that past deals suggest management will achieve.

I liked PNC before, and I still like it now. I thought BBVA was undervalued when I last wrote about the company, and while the BBVA USA sale is a good value-creation opportunity, core underlying performance has been less impressive.

 

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BBVA, PNC Strike A Win-Win Deal For BBVA's US Operations

PNC Financial (PNC) has been consistent in their belief that they can best serve investors by pursuing selective organic consumer and commercial bank growth opportunities in lieu of whole bank M&A, and the last couple of quarters would seem to suggest that they're on to something in the commercial bank, as PNC continues to outpace its peers in loan growth. With spreads likely to get worse from here, PNC's organic growth potential may well help it stand out from the crowd.

I liked PNC a quarter ago, and the shares have outperformed the banking sector since then (and the market as a whole). The shares are trading closer to fair value now, but PNC offering a more credible case that it can offset spread compression with organic growth and above-peer loan growth, I'd be inclined to prefer a fairly-valued PNC to some undervalued bank stocks with less impressive near-term drivers.

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PNC Financial Leveraging Organic Growth As A Not-So-Secret Weapon

PNC Financial Posting Healthy Loan Growth, But Cycle Peak Pressures Emerging

In the competition for best-run bank in the U.S., at least among the heavyweights, PNC Financial (PNC) brings a pretty strong case in its favor. While I haven’t always been excited about the valuation on the shares, I liked it back in January and the shares have outperformed the major regional bank indices since then, though the sector has continued to lag the S&P 500.

Looking at the bank again in the light of first-quarter earnings, nothing really changes in my mind. The better than expected loan growth is of course nice to see, and the increases in loan provision expense and deposit costs isn’t a surprise to me. I still have sector-wide worries that we’re descending from a peak and that is going to make share price outperformance more challenging, but this remains a worthwhile holding for those investors who are less inclined to try to time market cycles and would rather have a longer-term position in American banks.

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PNC Financial Posting Healthy Loan Growth, But Cycle Peak Pressures Emerging

JPMorgan Back On Track As One Of America's Best Banks

Investors are still generally skeptical about the earnings growth prospects for banks at this point in the cycle, and JPMorgan's (JPM) rare miss for the fourth quarter didn't help. I wasn't that concerned about the miss at the time, and with first quarter results coming in ahead of expectations despite somewhat weak lending, I'm still not all that concerned about JPMorgan's performance and prospects. While a broader slowdown in the U.S. economy would, of course, create new headwinds, and I do believe the bank sector is past the peak in terms of metrics like credit quality, these shares still look undervalued and have appeal as a longer-term core holding.

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JPMorgan Back On Track As One Of America's Best Banks

Does KeyCorp Really Deserve To Be So Unpopular?

What do you do with a stock that seems too cheap when you’re not all that fond of the company? That’s the question I have with KeyCorp (KEY), as this is definitely not my favorite bank, but I can’t really get a good handle on why it is trading so far below what would otherwise seem to be a normal valuation range. KeyCorp’s long-term track record isn’t the best, and there are issues with its deposit base and branch network, but it seems like the Street is really down on this name relative to the underlying fundamentals.

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Does KeyCorp Really Deserve To Be So Unpopular?

CenterState Is An Attractive 'Strong Getting Stronger' Story

This isn’t a great point in the banking cycle, as rate hike benefits are tapering off, the economy seems to be slowing, and credit costs are likely to increase substantially from here. That said, if you are still interested and willing to invest in banks, I think Florida’s CenterState (CSFL) is a name to consider. It’s a higher-risk, higher-growth story than ideas like SunTrust (STI), PNC (PNC), or BB&T (BBT), but management has generated some impressive results with a coherent, disciplined M&A and organic growth plan. Moreover, I think CenterState could be a “heads you win, tails you win” situation with respect to M&A – I believe CenterState would be an attractive target to many super-regionals, but they don’t need to get bought for this idea to work.

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CenterState Is An Attractive 'Strong Getting Stronger' Story

With The Market Afraid Of Banks, U.S. Bancorp's Safe Haven Reputation Helps

In a bad market for banks, U.S. Bancorp (USB) has managed “less bad” performance, with the shares doing better than the average bank (down 13% versus a roughly 20% drop over the past year) and better than peers like PNC (PNC), Wells Fargo (WFC), and Citigroup (C), and particularly so in the last three to six months, as the Street seems slightly consoled by U.S. Bancorp’s more bullish loan growth outlook for 2019 and its improving operating leverage.

U.S. Bancorp makes sense as a safe haven/flight-to-safety pick in banking, as the company has long been a leader in efficiency and profitability. While I think U.S. Bancorp may see a little more pressure on spread-based revenue growth than some bulls believe, I think the bank’s strong fee-generating operations will help fill the breach, as will improving operating leverage.

The banks I think are run best and best-positioned for this part of the cycle (JPMorgan (JPM), BB&T (BBT), and USB) seem to offer the least upside from here relative to names like PNC, Wells Fargo, and Citi, and that’s not exactly surprising given the sharp sentiment shift. U.S. Bancorp probably has less upside if 2019 turns out to be better than expected, but I continue to believe this is a solid long-term core holding for more conservatively-inclined investors.

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With The Market Afraid Of Banks, U.S. Bancorp's Safe Haven Reputation Helps

Citi Getting No Love As Macro Risks Mount

Liking Citigroup (C) has never been a particularly popular call, and to be honest, the skeptics have been right about it this year, as Citi has lagged other large banks like JPMorgan (JPM), Bank of America (BAC), Wells Fargo (WFC), and PNC (PNC) this year, and particularly so over the last three months. With weak pretax margins, some global macro risk, rising credit risk, and ongoing struggles with efficiency, I suppose I can understand why investors wouldn’t be so eager to own this name going into what could be a more challenging 2019.

Defending Citi isn’t really high on my to-do list, as I don’t think it’s a particularly well-run bank. That said, I find it interesting that Citi is valued the way it is, as it seems like the market is much, much less forgiving to under-earning banks than it has been in the past. A long-term earnings growth rate of just 4% could support a fair value in the $70’s, but it is clear to me that Citi has a lot of work to do to both improve its financial performance and its perception.

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Citi Getting No Love As Macro Risks Mount

Sandy Spring Bancorp Looking Undervalued, But Funding Remains A Risk

With the calendar about to turn and most U.S. banks great and small having been pummeled in recent months, I wanted to review Sandy Spring Bancorp (SASR) again as an idea for 2019. The metro DC region still looks pretty healthy and loan demand does not seem to be a serious concern for Sandy Spring. Deposit growth and funding costs remain a risk, though, as Sandy Spring management has had to get more creative in securing the funds it needs to support profitable growth.

Sandy Spring still sees itself as a buyer, not a seller, but the decline in the share price may well cool near-term deal activity. Although I do think the overall environment for banks has deteriorated somewhat from the middle of 2018, I still believe Sandy Spring can generate high single-digit long-term earnings growth, supporting a fair value close to $40.

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Sandy Spring Bancorp Looking Undervalued, But Funding Remains A Risk

BB&T Committing To Tech Over M&A To Drive Growth

In a relatively short of period of time, both the operating environment and operating philosophy of BB&T (BBT) seem to have changed in meaningful ways. Management has now gone out of its way to make clear that its priorities lie with organic, tech investment-driven growth versus M&A, while the regulatory environment seems to be moving in a direction that will allow BB&T to run a leaner, higher-yielding balance sheet.

While not all of BB&T’s recent updates were universally positive, and my fair value is not really changing at this time, all told I believe BB&T is on a good path. Although I do still believe that there are a few more deals in BB&T’s future, I can’t argue with a management strategic that is focused on being leaner and more responsive while exploiting the bank’s existing specialty capabilities.

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BB&T Committing To Tech Over M&A To Drive Growth

Sluggish Results And Guidance Renew Questions About BB&T's Self-Improvement

I had thought BB&T (BBT) had been making some progress in resolving at least some of the issues that had led the bank to underperform peers like PNC (PNC), SunTrust (STI), Fifth Third (FITB), and Regions (RF) in recent years. One quarter doesn’t really change a story, but BB&T’s lackluster results and guidance do suggest that the turnaround isn’t happening quite as fast or smoothly as the bulls might hope.

While the sell-off after earnings was probably at least partly due to the lower guidance, I believe the market also didn’t like the indications that large bank M&A was likely coming back onto the near-term agenda once the bank is fully clear of its consent orders. Selling BB&T because you don’t like M&A seems pretty silly given that M&A has always been core to this company (and management has never backed away from that as an ongoing long-term driver), but then that’s Wall Street for you.

I can’t say that BB&T is all that cheap today, and I’m a little troubled that BB&T seems to be unable to generate the sort of growth initiatives that peers like PNC have put into place. Although the shares are somewhat undervalued on the assumption of mid-single-digit long-term earnings growth, I won’t make a forceful argument that investors should choose this stock over PNC, U.S. Bancorp (USB) or other options in the banking sector.

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Sluggish Results And Guidance Renew Questions About BB&T's Self-Improvement

First Horizon's Footprint And Business Mix Should Drive Long-Term Growth

With good strategic positioning across the Southeast U.S., deal synergies, a respectable specialized lending business, and an asset-sensitive balance sheet, First Horizon (FHN) looks well-placed to deliver good growth so long as the economic cycle stays positive. That makes a softer than expected first quarter a little easier to digest, though investors should keep an eye on the competitive factors pushing up deposit betas and the still-sluggish overall environment for loan demand.

First Horizon looks priced for high single-digit to low double-digit annualized returns, which isn't bad, but I like to pay $0.90 (or less) for a dollar of value and bank stocks are no exception. To that end, there are cheaper bank stocks that I'd favor today, but First Horizon deserves a spot on a watch list and certainly doesn't seem like a bad hold now.

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First Horizon's Footprint And Business Mix Should Drive Long-Term Growth

Not Much Going Right For Wells Fargo Yet

When I last wrote about Wells Fargo (WFC) earlier this year, I thought the shares were undervalued, but that the company was going to need time to pull itself out of the hole it created with its fraudulent sales/account processes. Since then, the shares have continued to underperform peers like Citigroup (C), Bank of America (BAC), JPMorgan (JPM), PNC (PNC), and U.S. Bancorp (USB), as the bank's performance continues to underwhelm on multiple fronts.

Although the shares do still seem undervalued (in a relatively expensive banking sector), the weak trends in loan growth, interest margin expansion, and key fee-generating businesses are a concern to me. I do believe Wells Fargo's huge deposit base and strong market share across a wide swath of the country should, and does, count for something, as well as the bank's sizable middle market and asset-backed/equipment finance operations. For patient investors who can live with near-term underperformance, these shares are still worth consideration.

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Not Much Going Right For Wells Fargo Yet

JPMorgan: Another Quarter, Another Beat

The idea of “core” earnings can seem a little wobbly when it comes to large banks, but JPMorgan Chase (JPM) has been executing well relative to expectations for almost three years now. Not only has JPMorgan maintained a strong position in areas like trading and credit cards, it has shown that it can grow share in retail banking, commercial banking, and commercial services. With that, JPMorgan shares have done quite well over that same time period – handily beating Citigroup (C), U.S. Bancorp (USB), and Wells Fargo (WFC), and outperforming Bank of America (BAC) and PNC (PNC) too, although just barely in the case of PNC.

Although the shares no longer look like a clear-cut bargain, that’s a common issue across the banking sector (if not the market as a whole). It does still look as though the shares are priced for mid-to-high single-digit returns, so I wouldn’t be in a big hurry to sell – particularly as I believe JPMorgan still has opportunities to drive worthwhile revenue and earnings growth in the coming years.

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JPMorgan: Another Quarter, Another Beat

Lackluster Results Don't Help The BB&T Story

BB&T (NYSE:BBT), like almost every bank, has gotten a bump since the election. Even so, it has been outperformed by many of its peers since the election (up around 18% versus 19% to 35% for U.S. Bancorp (NYSE:USB), Fifth Third (NASDAQ:FITB), Regions (NYSE:RF), Wells Fargo (NYSE:WFC), and PNC (NYSE:PNC)), and fourth quarter results weren't a particularly strong rebuttal to the idea that BB&T has near-term growth challenges.

I believe that BB&T has been taking steps recently, and will continue do so into 2017, that will better position the company for long-term growth, but it's harder to argue that there will be incoming outperformance to support higher multiples in the near term. Although I still like this bank, I think the valuation already embeds higher growth than is expected from the likes of Fifth Third, U.S. Bancorp, PNC, and Wells Fargo, and I can't make a compelling "buy this instead of that" argument at this time.

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Lackluster Results Don't Help The BB&T Story

PNC Financial Waiting For Multiple Drivers To Get Into Gear

PNC Financial (NYSE:PNC) has had a solid run since the election, with the shares still up more than 25% from the start of November on investor enthusiasm over the prospect of lower tax rates, stronger economic growth, less regulation, and reflation. While PNC management is still finding it challenging to grow lending in the current environment, management is looking to address this issue while also looking for ways to build up its fee-generating businesses and continue on with its branch operation improvement strategy.

Modeling isn't particularly easy right now, as the Street seems more than happy to factor in the benefits of a lot of policy shifts that have been only vaguely outlined so far. To that end, I am factoring in drivers like improving spreads and lower deposit betas, but I haven't yet changed my tax rate assumptions for PNC. My assumptions work out to mid single-digit mid-term and long-term earnings growth and a low double-digit return on tangible equity, and PNC is not particularly cheap on either an absolute or relative basis.

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PNC Financial Waiting For Multiple Drivers To Get Into Gear

Flush With Capital, Beneficial Looking To Build Value For Shareholders

For all of the attention (if not hype) given to banking markets in southern states like Texas, Florida, Georgia, and North Carolina, it's worth remembering that there are still worthwhile markets in a lot of other places. Philadelphia isn't going to top the charts for population or household income growth, but it is still a large and growing market where banks like Beneficial Bancorp (NASDAQ:BNCL) can do well for shareholders by focusing on service quality and outperforming national and super-regional banks like Wells Fargo (NYSE:WFC), PNC (NYSE:PNC), and Bank of America (NYSE:BAC).

Not that far removed from its full conversion from a mutual holding company, Beneficial is flush with capital and holds a top 10 position in the Philly MSA. While current reported returns on assets and equity don't look good, I expect improving operating leverage in the coming years to complement steady loan growth, growth in non-interest income, better spreads, and capital deployment into M&A. Beneficial isn't undervalued today on its own merits, but I suppose there's a potential relative value call for more aggressive investors.

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Flush With Capital, Beneficial Looking To Build Value For Shareholders

BB&T Has A Lot To Digest While The Market Crawls Along

I can usually manage to find the cloud for every silver lining, but I'm pleased to see BB&T's (NYSE:BBT) shares up about 16% from the last time I wrote on this North Carolina-based super-regional bank. Loan growth is still so-so, and the market backdrop (lower rates for longer) isn't so conducive to management's earlier margin targets, but credit quality remains pretty good, and BB&T has the opportunity to generate revenue and cost synergies from significant M&A that most of its peers don't.

My valuation hasn't changed all that much for these shares. I believe the company's acquisition spree boosts its long-term earnings growth potential above 10% (non-organic, clearly) and that a $41 fair value is reasonable today. That said, it's harder for me to identify the shiny/sparkly bits that would captivate the Street's attention in the short term, so this looks more like a solid hold than a compelling buy to me.

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BB&T Has A Lot To Digest While The Market Crawls Along

JPMorgan Continues To Outperform In A Tough Market

I really can't complain about how the market has been treating JPMorgan Chase (NYSE:JPM) this year. I've long thought this is one of the best-run large bank franchises, and the shares are up almost 20% from my last article - well ahead of the likes of Wells Fargo (NYSE:WFC), Citigroup (NYSE:C), Bank of America (NYSE:BAC), U.S. Bancorp (NYSE:USB), and PNC (NYSE:PNC). Not bad for a supposedly "sluggish" franchise, right?

I continue to be impressed with the combination of expense reduction, balance sheet shrinkage, credit quality, and loan growth that JPMorgan is delivering, and that's all in an environment that isn't especially conducive to bank profit growth. Weak rates remain a headwind and banks are clearly economically-sensitive companies, but nothing about JPMorgan's performance leads me to think that double-digit ROEs are an aggressive expectation if/when rates head back up. While the shares would look about 10% overvalued if those rate increases never come, I believe these shares remain undervalued below $71 to $72.

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JPMorgan Continues To Outperform In A Tough Market

Seeking Alpha: Fifth Third Catches Up To The Pack

Like Wilshire Bancorp (NASDAQ:WIBC), I thought Fifth Third (NASDAQ:FITB) offered investors some interesting and attractive value back in January of this year. Like in the case of Wilshire, I thought that investors would have to have some patience to see the Street come around and recognize that value given a less-exciting outlook for loan growth and interest spread improvement. And like in the case of Wilshire, I was wrong about the timing - the shares rose almost 25% since that piece, very nearly making it the best performer in its weight class (just edged out by Key (NYSE:KEY), but Regions Financial (NYSE:RF) is very close behind).

I'd just as soon see my performance come sooner than later, so I'm not complaining that Fifth Third has gotten the recognition I thought it was due. Looking ahead, though, here again we have another story where the future returns are likely to be more traditionally "bank-like", with future rate hikes, expansion of fee-generating businesses, and expense reductions as the primary performance drivers. Given better valuation I'd lean more toward U.S. Bancorp (NYSE:USB) today with new money (or banks outside the U.S.), but Fifth Third isn't overvalued today and can still generate a decent return from here.

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Fifth Third Catches Up To The Pack