IB Traders’ Insight

View The Latest Videos View Videos


Interactive Brokers - Fifth Third Bancorp Merges with MB Financial as Congress Unleashes Bill to Help aid Regional Banks

Cincinnati-based Fifth Third Bancorp (FITB) recently agreed to acquire Chicago-headquartered MB Financial (MBFI) for roughly US$4.7bn amid congressional plans to scale back the severity of the 2010 Dodd-Frank Act.

FITB said it will pay an estimated 90% in stock for the acquisition, with the rest in cash.

Following FITB’s purchase of the lower and middle-market commercially-focused bank, the combined entity would gain considerable market share in the region.

If successful, the merger will result in a total Chicago deposit market share of 6.5%, ranking it fourth in total deposits and second in estimated retail deposits among the almost 200 banks in the marketplace. The combined company will also own a 20% share of middle market relationship s in Chicago, ranking it second.

 The deal comes as congressional leaders voted in favor of Republican-led legislation to loosen the legal framework of Dodd-Frank, which was intended to tighten bank regulations in the wake of the financial crisis of 2007-2008.

The legislation generally aims at lifting the most stringent requirements for small and medium-sized financial institutions, including regional and community banks, as well as credit unions. For example, the threshold for annual regulatory stress testing would be raised five-fold to apply to banks with US$250bn in assets.

The move would remove some of the regulatory burden from regionals such as FITB, which posted around US$141.5bn in total assets as of the end of March 2018. Its acquisition of MBFI – which has US$20bn of assets – would still maintain the combined entity’s position below the bill’s line in the sand for a systemic threat to the financial system.

Upbeat outlook as rates rise

Most analysts view FITB’s merger with MBFI as having a positive outcome.

DBRS analysts John Mackerey, Michael McTamney and Michael Driscoll noted the acquisition as “strategically compelling” as it improves FITB's franchise by “adding scale and expertise in the highly
competitive, but attractive Chicago market.” DBRS also said while it expects the firm’s capital levels to be impacted, including a 45bp drop in the Tier 1 ratio, its pro forma capital levels will remain at “solid” levels.

At the end of March 2018, FITB’s Basel III common equity Tier 1 (CET1) ratio was a “healthy” 10.8%.

Moreover, corporate tax cuts and rising short-term interest rates may help improve FITB’s operating environment and bolster its bottom line.

Market participants widely expect the Federal Reserve’s Federal Open Market Committee (FOMC) to hike interest rates at the conclusion to its next meeting June 13, after raising the federal funds rate by 25bps in March to a target range of 1.5-1.75%.

In the minutes to its May meeting released Wednesday, the FOMC said: “Most participants judged that if incoming information broadly confirmed their current economic outlook, it would likely soon be appropriate for the Committee to take another step in removing policy accommodation.”

Meanwhile, FITB said it intends to complete its 2017 CCAR buyback plan by repurchasing up to US$235m of its stock before shareholders vote on the MBFI deal, and, subject to regulatory approvals, may buy back additional shares after the vote.

Shares of FITB and MBFI were each up about 0.1% on the day Thursday, while most big US banks’ stocks fell around 1.5%. The Financial Select Sector SPDR Fund (XLF) was also off around 1.1% on the day to US$27.85, as geopolitical volatility surrounding global trade, as well as US-North Korea relations, resurfaced.

Senior financials outperformed other sectors in the investment-grade corporate bond secondary market, as cash spreads tightened by roughly 0.4bp to an OAS of more than 84.5bps. FITB’s cash spreads were about flat at a little over 60bps, while its subsidiary Fifth Third Bank narrowed by 1bp to around 33bps.  

The OAS on all cash bonds widened a touch to nearly 101.5bps, and the IG CDX index – a gauge of the mood in the credit markets – widened by around 0.8bp on the day to almost 63bps.

The analysis in this article is provided for information only and is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad-based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation by IB to buy, sell or hold such investments. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.




We appreciate your feedback. If you have any questions or comments about IB Traders' Insight please contact ibti@ibkr.com.

The material (including articles and commentary) provided on IB Traders' Insight is offered for informational purposes only. The posted material is NOT a recommendation by Interactive Brokers (IB) that you or your clients should contract for the services of or invest with any of the independent advisors or hedge funds or others who may post on IB Traders' Insight or invest with any advisors or hedge funds. The advisors, hedge funds and other analysts who may post on IB Traders' Insight are independent of IB and IB does not make any representations or warranties concerning the past or future performance of these advisors, hedge funds and others or the accuracy of the information they provide. Interactive Brokers does not conduct a "suitability review" to make sure the trading of any advisor or hedge fund or other party is suitable for you.

Securities or other financial instruments mentioned in the material posted are not suitable for all investors. The material posted does not take into account your particular investment objectives, financial situations or needs and is not intended as a recommendation to you of any particular securities, financial instruments or strategies. Before making any investment or trade, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice. Past performance is no guarantee of future results.

Any information provided by third parties has been obtained from sources believed to be reliable and accurate; however, IB does not warrant its accuracy and assumes no responsibility for any errors or omissions.

Any information posted by employees of IB or an affiliated company is based upon information that is believed to be reliable. However, neither IB nor its affiliates warrant its completeness, accuracy or adequacy. IB does not make any representations or warranties concerning the past or future performance of any financial instrument. By posting material on IB Traders' Insight, IB is not representing that any particular financial instrument or trading strategy is appropriate for you.