The Pittsburgh-based regional bank PNC Financial Services Group (PNC -0.71%) made a splash last year when it sold its longtime stake in the world's largest asset manager, BlackRock, and said it would use the proceeds to look opportunistically for a large acquisition. In November, PNC made good on that promise, announcing that it would acquire the U.S. banking division of the Spanish lender BBVA, which came with more than $100 billion in assets and a presence in attractive banking markets such as Florida, Texas, Arizona, and California.
In June, PNC formally closed on the $11.5 billion acquisition. Here's what to expect next.
Integrating BBVA into PNC
With regulatory approval secured and the acquisition formally closed, PNC has cleared a major hurdle with the market. While most banking deals that are announced do go through, shareholders will feel some relief to see that one of the larger acquisitions of recent years is moving forward.
With that said, the real work is only just beginning. Now, PNC must integrate BBVA into its operations. This involves the technical integration of bringing BBVA onto PNC's core operating systems and changing all of the branding and logos at all the branches. Then there is combining each bank's culture and getting everyone on the same page. Then there is the financial work, which involves eliminating expenses that are no longer needed and taking advantage of revenue opportunities by cross-selling products and services from each bank to the other bank's customers.
You can actually track some of these stages through the bank's quarterly data. For instance, we know that PNC expects to spend $980 million on merger and integration expenses, which are one-time costs and non-recurring. These started to trickle into the company's expenses in the second quarter of the year.
Image source: PNC investor presentation Q2 2021.
As you can see in that little gray section at the top of the 2Q21 bar, PNC had $181 million of its expenses related to significant items in the quarter, of which $101 million went to integration costs. PNC's CFO, Rob Reilly, said to expect the majority of the $980 million in merger and integration expenses to come through this year, so expenses may be elevated for the next few quarters. Also, due to the low rate and challenging revenue environment, mainly due to a lack of loan growth, expect PNC's efficiency ratio (expenses expressed as a percentage of revenue, so lower is better) to be elevated the rest of the year as well. PNC's 65% efficiency ratio in Q2 was the highest the bank has had over the last five quarters.
Image source: Getty Images.
Further tracking acquisition progress
Following the integration and merger costs, the bank also expects to eliminate $900 million of BBVA's annual non-interest expenses, or roughly 35%, in 2022. So while expenses and the efficiency ratio may be elevated this year, they should start to abate in 2022 as the cost savings kick in. PNC has told us that earnings per share (EPS) in 2022 should be 21% higher with BBVA attached than what PNC was expected to generate on a stand-alone basis. And that's largely due to these cost savings, so be sure to track merger and integrations costs, cost savings, and EPS to know the bank is staying on track.
Longer term, you also want to look for the bank to grow revenue with BBVA. Revenue synergies are not modeled into the deal's financials, but investors and the bank will definitely hope to see some once BBVA is fully integrated and the $900 million in annual costs are stripped out. The main opportunities are expanding PNC's national commercial and industrial lending model to BBVA markets, as well as offering BBVA clients fee income products that BBVA couldn't previously offer.
PNC has a good track record of integrating and successfully enhancing shareholder value through acquisitions, and the bank is off to a good start, with all of its projected financials regarding the deal either on schedule or coming in better than expected, as of June 30.
Image source: PNC investor presentation Q2 2021.
Keep watching
PNC is off to a good start following the closing of its acquisition of BBVA USA. But watch carefully to make sure that merger and integration costs don't exceed $980 million, and that the bank achieves its full $900 million in cost savings and 21% EPS growth in 2022. These are all key to making the deal financially attractive to investors. Longer term, investors will probably want to see some revenue growth start to materialize toward the end of 2022 and early in 2023. Most acquisitions look good when they are announced, but can fall woefully short when everything is said and done, which is why it's important for investors to pay close attention and hold the bank accountable.
