Friday, January 12, 2007

Morningstar Speculates on RBC Centura & BB&T Combination

  
Financial Post, Duncan Mavin, 12 January 2007

The tenth-biggest bank in the United States could be an acquisition target for the biggest bank in Canada, according to a note from Morningstar analyst Michael Kon.

Branch Banking and Trust Co. is looking for a merger partner and Royal Bank of Canada's U.S. subsidiary, RBC Centura, fits the bill, Mr. Kon said.

BB&T has 1,400 branches in 11 states. But the U.S. banking industry is anticipating a wave of consolidation that could leave BB&T's network looking a bit undersized if it can't find a way to grow.

"Centura has about US$20-billion in assets and, given Canada's saturated market, Royal Bank of Canada is looking for growth in the United States," he said.

However, don't expect a deal any time soon. Mr. Kon's note is the result of a statement from BB&T's chief executive in November, 2006, who said his bank will need to enter into a merger of equals in the next five to 10 years in order to remain competitive.
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Morningstar, Michael Kon, CFA, 10 January 2007

In mid-November, BB&T CEO John Allison said his bank will need to enter into a merger of equals in the next five to ten years in order to remain competitive in the increasingly consolidating U.S. banking market. Although we don't think such a deal is essential, this statement has triggered a debate on who might join BB&T at the altar. While several banks fit the bill of possible suitors, no clear front-runners have emerged. Cultural differences, corporate structures, and unattractive footprints are good reasons to disqualify Fifth Third Bancorp, National City, and Sovereign Bancorp as merger partners.

We think a less intuitive but nonetheless compelling candidate not mentioned in this deal chatter is RBC Centura, a wholly owned subsidiary of Royal Bank of Canada. Centura has about $20 billion in assets and, given Canada's saturated market, Royal Bank of Canada is looking for growth in the United States. Allison probably didn't have Centura in mind when he talked about making a deal. However, we think such a combination can be a boon for both parties.

First, a deal with Centura might not mean that Allison has to find a new job after selling BB&T. The Canadians could find Allison's Southern roots, market savvy, and solid record quite suitable to lead the combined entity's commercial and retail banking operations. Besides, in this marriage, BB&T will contribute about 5 times more in assets than RBC. Allison will have to be on board to make this combination work.

Integrating Centura and BB&T won't be a walk in the park, but we think the bounties are plentiful. The two banks compete with each other in many Southern markets. A merger would allow them to consolidate branches, thus reducing operating expenses. Another source for synergies would be combining BB&T's insurance, asset-management, and capital markets businesses with Royal Bank of Canada's U.S. operations.

Merging with Centura would place Allison at the helm of a regional powerhouse with international ties. Though he won't head an independent entity, we think Allison will find that Royal Bank of Canada is capable of keeping its mitts off and letting him run the show according to his personal beat. From the Canadian bank's perspective, Centura is currently in the middle of the pack. A merger with BB&T could turn the franchise into a dominant regional player.
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