BB&T, SunTrust Merger Looks Favorable

We look favorably on the announcement that narrow-moat BB&T BBT and no-moat SunTrust Banks STI will combine their operations in a merger of equals. The move combines two of the larger U.S. regional banks to form a superregional with roughly $442 billion in assets; it would be the sixth-largest U.S.-based bank, right behind wide-moat U.S. Bancorp (which had $467 billion in assets at the end of 2018) and ahead of no-moat PNC Financial ($382 billion in assets). At first glance, we believe this deal makes a lot of sense. We expect to adjust our fair value estimates to reflect the costs and benefits of the deal after we more fully incorporate the financial implications into our models. The deal, which involves each SunTrust shareholder receiving 1.295 shares of BB&T per share of SunTrust held, is expected to close by the fourth quarter.

BB&T and SunTrust have a decent amount of footprint overlap, with both heavily concentrated in the Mid-Atlantic and Southeast regions of the United States. This should allow the combined firms to meet their estimated cost savings of $1.6 billion, equivalent to 12.5% of their combined expense base. The deal also provides many complementary strengths, which we believe will be more efficient and more scalable once the two banks are combined, including BB&T's leading insurance brokerage (which SunTrust lacked) and SunTrust's more advanced digital lending operations. It also combines BB&T's strength in retail community banking with SunTrust's strength in investment banking and commercial banking, improving the overall positioning of both firms. Overall, we expect the cost savings and increased scale and scope provided by the merger to lead to better results over the long run, with management expecting the new bank to produce an efficiency ratio of 51% (which would be one of the best in the industry) and a return on average tangible common equity of 22% (which would also be industry leading).

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