BB&T Corp. said that its pending merger with SunTrust Banks Inc. is an opportunity for the companies to reset their interest rate positioning and jettison unwanted assets.
"Both companies are looking at their balance sheets very thoroughly right now," BB&T CFO Daryl Bible said on a conference call to discuss third-quarter results. "One of the things we want to do when we combine is we want to make sure our interest rate sensitivity is relatively neutral to slightly biased up a little bit. We'll try to get it to be more neutral so we don't have a huge impact to [net interest income] as rates continue to change."
Bible said the banks will also review loans and portfolios they might want to unload because of credit concerns or because they do not deliver "the best performance from a capital return perspective."
"We'll have more color on that later in the quarter as the deal closes," he added.
Chairman and CEO Kelly King gave a relatively upbeat assessment of the economy but acknowledged considerable risks, particularly in the trade outlook. Given the uncertainty, he said, "We're being very cautious in terms of everything we do in terms of capital, liquidity and diversification because we simply are in an environment where to place a high bet on any one scenario up or down is not a smart bet."
The companies are waiting on the Department of Justice to sign off on their branch divestiture plan and for other government approvals. King said that regulators "are being deliberate, given the size and significance of this deal."
Executives still anticipate completion in the fourth quarter, but King said that they "are aware that it possibly could slip to the first quarter."
BB&T bought about $5 billion in securities late in the third quarter to enhance its liquidity position ahead of the merger, a move that dinged its net interest margin, which fell five basis points from the previous quarter to 3.37%.
The Federal Reserve recently finalized rules that ease liquidity requirements for banks in the combined company's size category, but Bible said BB&T and SunTrust still need to add liquid assets to meet the reduced standard.
Bible said that BB&T would probably have to increase its allowance for loan losses by 30% to 50% under the current expected credit loss standard, but that the estimate could be irrelevant if the deal closes in the fourth quarter. (For large, public companies, CECL is scheduled to go into effect at the beginning of 2020.) Bible said BB&T and SunTrust are still working on estimates for the combined company, which is to be named Truist.
King said Truist will still target a Tier 1 common equity ratio of 10% to start, a level that he says has "a lot of cushion in it" because the deal is "a whopping big merger."
But he added that, while the company will take a conservative approach, the target capital level is dependent on the evolving risk environment.
"When we get to a more tranquil or predictable environment, I don't think 9% is inappropriate at all," he said. "As things stabilize, I will be recommending to the board that we consider a lower target capital level."