BB&T Corp.'s consent order effectively precludes the bank from acquiring other institutions, cutting off a key driver of growth as it nears a significant regulatory threshold.
The bank announced in a Dec. 20 release that unit Branch Banking and Trust Co. entered into a consent order with the FDIC and the North Carolina Commissioner of Banks over internal-control deficiencies related to its Bank Secrecy Act and Anti-Money Laundering compliance program; it expects to enter into a similar order with the Board of Governors of the Federal Reserve System.
The order effectively prohibits the bank from participating in whole-bank acquisitions, analysts say, which coincides with management's reiteration that the bank would step away from the M&A market in April, following the completion of several bank deals. At the time, the move was understood to allow the bank to focus on integration and leveraging its new footprints; the consent order adds a new motive.
Evercore ISI analyst John Pancari noted in a Dec. 20 report that the bank hired its BSA/AML senior compliance officer in April, "hence implying the timing of early communication with the regulators regarding the BSA/AML deficiencies."
Compass Point analyst Scott Valentin said the bank has relied on acquisitions to grow in recent years, and "the consent order only adds uncertainty surrounding when [BB&T] will be able to resume M&A activity."
The bank said it has already made investment into its processes and system upgrades. Valentin wrote that after the bank corrects the deficiencies, it will enter a monitoring period to ensure compliance before the order is lifted. The effort is not expected to have a "material expense impact," Pancari wrote. He said management has built out compliance efforts over the last several years, and disclosed expenses had already been built into the run rate.
Still, the consent order means BB&T may not return to the M&A market until the "2018 CCAR ask," wrote Sandler O'Neill analyst Stephen Scouten on Dec. 21. He had expected the bank to start looking for new deals in mid-2017.
Mergers have been an important part of BB&T's growth story. The bank went on a 12-month M&A streak in late 2014, starting with the acquisition of Bank of Kentucky Financial Corp. Once given the green light for deals, the bank sought bigger targets in a bid for expansion in Pennsylvania. It acquired Susquehanna Bancshares Inc., which had $18.66 billion in assets at the end of the second quarter of 2015, and National Penn Bancshares Inc., which had $9.6 billion in assets at the end of 2015. It also grew its insurance offerings through its acquisition of Swett & Crawford.
During the National Penn deal call, executives said they would take a pause from the M&A market. Chairman and CEO Kelly King said at the time: "If I had to guess what pause means, I would guess it means 6 to 12 months, but it's not five years and it's not 90 days." Analysts asked about it it in subsequent earnings calls, with management reiterating the pause.
"In August 2015, our executive management team announced a strategic decision to take a pause from M&A activity. This decision came after the purchase of 62 branches in Texas, wholesale insurance broker Swett & Crawford, and three bank deals in previous years and preceded this consent order. We’re currently focused on the successful execution and integration of these acquisitions and organic growth opportunities in areas including corporate, insurance and wealth," said Brian Davis, director of corporate communications for BB&T.
Those deals helped the bank, which had $222.62 billion in assets at the end of the third quarter, rapidly add assets and give it even more room to leverage for growth as it neared the $250 billion assets threshold. That threshold is associated with heightened regulatory standards and is likely to miss out on any regulatory relief, Valentin wrote.
With capital deployment through M&A off the table, the bank's additional stock buyback that coincided with the consent order disclosure seemed to make perfect sense to analysts. BB&T announced it will purchase an additional $200 million on top of its previously announced $640 million buyback following the bank's 2016 Comprehensive Capital Analysis and Review. The bank said the accelerated buyback will begin before the end of 2016 and conclude in early 2017.
"Strategically, the timing of the announcement also made sense as it coincided with the consent order announcement. With [BB&T] now out of the M&A market, it is logical that the company will focus on returning capital through buybacks as opposed to utilizing Fed approved repurchase amounts towards acquisitions," Valentin wrote.
According to Valentin's report, CCAR banks are permitted to make additional buyback requests as long as the institution is well-capitalized before and after the distribution, its performance and capital levels are consistent with its projections, it provided 15 days of advance notice to the Federal Reserve and the buyback does not exceed 1% of Tier 1 Capital. Pancari calculated the buyback would equal about 96 basis points of the bank's CET1 level and bring the combined payout ratio for the 2016 CCAR from 65% to 73%.
The incremental push in the payout ratio could foreshadow a "new floor" for the bank in the 2017 CCAR process, Scouten wrote. He believes BB&T executives will prioritize dividend increases, and could approach a 50% payout ratio in the next few years; but they could also leverage higher share repurchase levels depending on organic growth opportunities or the amount of time it takes to resolve the consent order.
"We think that this $840 [million] total repurchase level sets a new floor for next year's CCAR ask and seems to line up with CEO Kelly King's recent public comments that he expected capital repatriation (buybacks and dividends) to increase progressively with this 'new' banking environment," he wrote.