Eric Compton: M&A has been an ever-present topic within the banking space. The U.S. still has one of the most fragmented banking systems, and successful M&A tends to bring cost efficiencies and savings into the system. With the SunTrust/BB&T merger-of-equals announcement back in February, M&A speculation has ramped up to fresh highs.
While we agree that bank M&A makes more sense than ever given the increasing importance of size, scale, and scope, we think the list of potential partners among the large- and midsize regionals is becoming ever sparser. The conditions behind the BB&T and SunTrust merger were uniquely conducive for M&A by our analysis, and we do not see any partners among our current coverage list that make quite as much sense as BB&T combining with SunTrust. Therefore, we are more dour than some on the potential for future deals between larger banks. That said, we still see some potential tie-ups that could make sense. The key for successful M&A, in our view, remains the ability to have high cost savings. This allows the two combining franchises to operate better together than they would separately, and this is a primary creator of value. Cost savings are directly related to branch footprint overlap.
By our estimates, there is a high degree of overlap within the Midwest between Fifth Third, Huntington, and PNC, and some combination of two of these banks could make sense. We also see some potential for an acquisition by U.S. Bancorp of KeyCorp, although it is difficult to gauge interest from either bank in future potential mergers of this nature. We don't see much M&A potential among the other banks under our coverage.