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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.

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