First Citizens BancShares (NASDAQ:FCNCA) and CIT Group (NYSE:CIT) recently merged in an all-stock deal valued at $2.2 billion that will create the 19th largest bank in the U.S. First Citizens will be the surviving entity and the combined bank will have more than $100 billion in assets and continue to trade under the ticker FCNCA.
Following the announcement of the deal on Oct. 16, stocks for both companies surged, with First Citizens climbing more than 11% on the day and CIT Group accelerating more than 26%. Typically, the acquiring company tends to see its stock decline or rise very minimally following the announcement of an acquisition, so you know the market loves this deal. Here are three reasons why.
1. Attractive returns
Management says the deal will be accretive to earnings by roughly 53%. Currently, First Citizens is projecting stand-alone earnings of $46.08 per share in 2022. After the merger, First Citizens believes it can do earnings of $70.50 per share in 2022. The deal is also supposed to be 30% accretive to tangible book value per share (TBVPS), and increase First Citizens' stand-alone TBVPS from $341.21 to nearly $470 following the transaction. This will give First Citizens a more valuable currency, which is helpful when making acquisitions.
The deal will also improve First Citizens' return on assets, a measure of how well a company uses assets to generate profits, from 0.91% to 1.04% on a pro forma basis. It will improve First Citizens' return on average tangible common equity, a measure of the potential return investors can expect on their common shares, from 11.2% to 13%. And the deal will also drop First Citizens' efficiency ratio, a measure of a bank's expenses expressed as a percentage of revenue (so lower is better), from 63.8% to 55%. All of these metrics are closely watched by bank investors and represent attractive returns and an overall valuable franchise. These returns will be partly achieved by chopping combined expenses by 10% and increasing scale.
2. Low-cost deposits meet a strong commercial bank
First Citizens has an excellent deposit franchise that gives the bank a cheap source of funding, with its cost of deposits at just 0.13% at the end of the third quarter. The bank also has a loan-to-deposit ratio of just below 78%, meaning it has plenty of deposits to lend out right now if the demand is there. But the bank's commercial base could be better. "We were seeing so many opportunities around us, but simply didn't have the product and expertise to compete as effectively as we would have liked," First Citizens CEO Frank Holding Jr. said on a conference call following the merger announcement.
CIT Group will bring its roughly $37 billion of commercial loans and leases, and be able to help with its strong commercial loan products that include commercial finance, equipment finance, small business, commercial real estate, and much more. However, CIT Group has struggled to get its deposit costs down over the years, and currently has a cost of deposits of 0.91%, which isn't very good when you consider the Federal Reserve's benchmark lending rate is near zero right now. The combined bank will have a cost of deposits of 0.53%. CIT CEO Ellen Alemany also said on the conference call that First Citizens will help CIT Group fill in product gaps with products such as wealth management, trust services, insurance, and credit cards that it can cross-sell to many of its existing customers.
3. Full regulatory infrastructure
Banks are one of the most heavily regulated industries, and a lot of these regulations kick in when banks hit certain asset thresholds. For instance, when banks hit $100 billion in assets the Federal Reserve can require them to go through periodic, but extremely rigorous and comprehensive stress testing that can be very burdensome. With just $49 billion in assets on its own, Holding said First Citizens would have had to build the regulatory infrastructure for things like stress testing from scratch, a process that would have been extremely costly and inefficient.
However, CIT already has all of this infrastructure in place and can easily transfer and integrate it into the combined bank. That's because CIT has more than $60 billion in assets, and up until 2018, the Federal Reserve could require banks with more than $50 billion in assets to go through stress testing.