Did PNC Pay Too Much for BBVA’s US Business?

Regional banking leader PNC Financial Group Inc. (NYSE: PNC) is extending its reach beyond its strongholds along the Atlantic Coast and in the Southeast and Midwest. The group agreed on Sunday to pay $11.6 billion in cash to Banco Bilbao Vizcaya Argentaria S.A. (NYSE: BBVA) for most of the Madrid-based banks U.S. assets. The acquisition is expected to close in by mid-2021.

BBVA, primarily located in the sunbelt states of Alabama, Texas and Arizona, claims more than $100 billion in assets and, when the transaction is completed, the combined bank will become the nation’s fifth-largest bank measured by assets.

Certain of BBVA’s U.S. assets are not included in the deal: BBVA Securities; the New York branch that provides corporate and investment banking services; the San Francisco representatives office; and the fintech investment fund Propel Venture Partners. Propel is an investor in cryptocurrency exchange Coinbase, which is said to be preparing an IPO at a post-money valuation of around $8 billion.

Last April, PNC sold its 22% stake in BlackRock Inc. (NYSE: BLK) for some $15 billion. The proceeds of that sale were used to build a war chest for expansion. CEO Bill Demchak commented that the acquisition of BBVA’s U.S. business “will accelerate our growth trajectory and drive long-term shareholder value through the strategic deployment of the proceeds from the sale of our BlackRock investment.” Sunday’s deal gives PNC a presence in 29 of the 30 largest U.S. markets.

According to Sunday’s announcement, the all-cash deal values BBVA at nearly 20 times 2019 earnings and 1.34 times its tangible book value at the end of September.

In its press release, BBVA also noted that the sale price is 2.5 times the average analyst-assigned valuation for a business that represented just 10% of the parent company’s net attributable profit in 2019. The price also represents nearly half of BBVA’s current market cap of $24.9 billion.

For BBVA investors, the cash injection promises an “increase in distributions … with a sizeable buyback as an attractive option.”

PNC expects the deal to add 21% to 2022 earnings and “substantially” replace the net income from the bank’s former investment in BlackRock. The U.S. bank said that it expects $980 million in acquisition-related costs and expects to achieve cost savings of more than $900 million in annual noninterest expense through “operational and administrative efficiency improvements.”

Did the U.S. bank overpay?  The rich price appears to have met PNC’s national expansion goals in one of the fastest-growing regions of the country. But is buying more bricks and mortar the right strategy when mobile banking (fintech) is the growth driver in retail banking? PNC still has around $3 billion left from its BlackRock sale. Maybe development of its mobile business is next on PNC’s to-do list. The American Bankers Association recently noted that mobile banking use posted double-digit growth across every demographic except for Americans 65 years old or older.

BBVA shares traded up nearly 16% in Monday’s premarket session, at $4.33 in a 52-week range of $2.49 to $5.80.

PNC stock traded up about 1.8% to $125.00, in a 52-week range of $79.41 to $161.79. The consensus price target on the stock is $123.13, and the dividend yield is 3.75%.

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