PNC’s $11.6B BBVA Deal Shows Why Banks Must Consider Build Vs. Buy Amid The Great Digital Shift

digital banking

To get critical mass in banking — build or buy … but the quickest route to reach and scale, especially in digital endeavors is … buy.

To that end, Spanish financial firm BBVA said it would sell its U.S. arm, known as BBVA USA Bancshares, to PNC Financial Services Group, for $11.6 billion in an all-cash deal.

As noted in this space, the entity fashioned by the merger would take its place as the fifth-largest retail bank in the country, and with a presence that spans 24 states, and with a combined asset base of about $560 billion.

Those are, for lack of a better term, the mechanics of the deal. But behind mechanics lies strategy.

And, generally speaking, the strategy that exists in M&A boils down to a binary choice: build vs. buy. That’s true for a company that sells widgets or one that sells services. That’s true for a company that makes its bones in the financial services arena, too. And in this case, the decision seems to be buy — in a bid to gain critical mass, in terms of assets, and digital capabilities.

We’ve noted that the stage has been set for M&A to ramp up, due in part to lower corporate taxes, which gives firms higher profits, which in turn gives them more money to both extend loans (building up customer bases) and have money in hand to pursue deals. PNC sold its stake in Blackrock for $15 billion, adding to its dealmaking ability.

We’ve seen other mergers in the space, of course, where a $28 billion marquee all-stock deal was struck between BB&T Corp and SunTrust Banks to create Trust Financial Corp. Cadence Bancorp and State Bank Financial Corporation; Synovus Financial Corp’s and FCB Financial Holdings.

Reuters noted that the deal, for BBVA, represents a movement away from trying to develop its “western” frontier in cross-border fashion. That’s because the U.S. division of the firm has seen its bad debt charges rise. Indeed, delving into BBVA’s latest financial filings shows that provisions for credit losses through the first nine months of the year totaled a bit more than $1 billion, compared with $477 billion through the same period in 2019. Total non-performing assets as a percentage of loans stood at 2 percent at the end of the September period, compared to 1.25 percent in June. That’s been a hallmark of the pandemic, of course, where restrictions and economic headwinds have proven stubborn. Billions of dollars in cash, of course, help shore up dry powder, especially as margins are squeezed for banks in general.

Expanding The Digital Footprint  

As for PNC, it may be the case, and it shouldn’t be a surprise, that digital is increasingly in the crosshairs.

In a statement provided to PYMNTS, Bankrate Chief Financial Analyst Greg McBride said, “PNC’s acquisition of BBVA’s U.S. banking operations continues the consolidation among regional players being necessitated by low interest margins and the digital arms race in banking. Scale matters more than ever, especially with the growing technology investments needed to keep pace with the biggest banks and fintech start-ups.”

He went on to state, “This deal will expand PNC’s branch footprint and with virtually no overlap in their respective branch networks.”

BBVA had said in commentary on its most recent earnings call that digital interactions with customers have increased by a factor of five, and digital sales (for the company as a whole) have reached 64 percent in terms of units and 48 percent of value. Said CEO Onur Genc, “We keep talking about digital all the time, because we really believe in it, that there is something big is happening in our industry. But do we have a competitive advantage in digital. That is a critical question in our view.”

As reported over the summer, BBVA has been working with Google to offer consumers a digital bank account through Google Pay. The offering will be built on BBVA infrastructure and will be powered by Google Pay.

“When we launched our new five-year strategic plan in January, we said that two key pillars were to ​reach more customers​ with our digital offerings and use our expertise in finance, digital and innovation to help them improve their ​financial health​,” said Javier Rodríguez Soler, BBVA president and CEO, in a statement. “This collaboration with Google is fully aligned with this effort, even more so in today’s world, where the ability to conduct your financial life in a digital manner, from account opening to transacting to understanding financial health, is imperative.”

The deal between PNC and BBVA, then, ostensibly springboards PNC further ahead in its digital efforts. As noted in a recent roundtable discussion on B2B payments, Chris Ward, head of products and innovation, treasury management at PNC said the pandemic, similar to 9/11 is “another monumental event that will drive the shift to electronic payments.”

In the battle between build vs. buy, then, we may see an increasing shift to buy.

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