BREAKINGVIEWS-US bank deal subverts consolidation desires

By Stephen Gandel

NEW YORK, July 25 (Reuters Breakingviews) - American banks have bigger eyes than shareholders can stomach. Lenders Pinnacle Financial Partners PNFP.O and Synovus Financial SNV.N unveiled a $9 billion merger that is, in theory at least, exactly the kind of expansion the market wants to see. The reception, however, suggests the price of growth is too high.

Competitive pressures and more amenable regulators have stoked consolidation desires. Volume and valuations are on the rise, with 33 deals so far this year involving banks with at least $500 million of assets, compared to 20 at this stage in 2024, according to Evercore ISI analysts. Buyers are also paying 1.5 times tangible book value, on average, versus 1.3 times last year.

Before the industry can mint challengers to JPMorgan, or even PNC Financial Services, it will have to craft workable deals. Pinnacle and Synovus shareholders will each own about half the combined company, with Synovus boss Kevin Blair becoming CEO and Pinnacle’s Terry Turner chairing a shared board. This sort of structure has tripped up bank mergers before. Six years after BB&T and SunTrust combined, for example, the rebranded Truist is worth less than where it started.

Pinnacle and Synovus have big plans, though. They project 20% earnings growth in two years, helped by $250 million of annual cost savings that are worth about $2 billion today after taxing and capitalizing them. Synovus also plans to dump or write down $1.8 billion of losses on low-yielding loans and investments to free up capital.

It may be hard to squeeze out the equivalent of 10% of Synovus’ expenses, however, and cost some $700 million to do so. A combined balance sheet exceeding $100 billion also means extra regulatory burdens, such as drafting a living will in case of a crisis. Moreover, Tier 1 common equity at 9.8% of risk-weighted assets just barely clears the bar that typically worries Washington. To grow it to 11% in two years, as projected, assumes expenses at 47% of revenue, a superlative rate.

The sales pitch falls flat. Both banks promptly lost more than 10% of their value. Turner argues that not all mergers of equals are the same, noting that JPMorgan started as one with Chase. Putting himself in a category with the highly regarded Jamie Dimon doesn’t make it any easier to believe that additional mergers will be any more welcome.

Follow Stephen Gandel on LinkedIn and X.

CONTEXT NEWS

Pinnacle Financial Partners and Synovus Financial said on July 24 that they had agreed to merge in an all-stock transaction valued at $8.6 billion, which would create a regional bank with nearly $115 billion in assets, mostly in southeastern United States.

Under terms of the transaction, Synovus shares are being valued at $61.18 apiece, a roughly 10% premium to where they closed on July 21 when media reports surfaced about a possible deal. Pinnacle shareholders would own about 51.5% of the combined company with Synovus shareholders owning the rest.

Synovus Chairman and CEO Kevin Blair is slated to be CEO of the newly enlarged lender while Pinnacle CEO Terry Turner would serve as chairman. The banks expect to generate $250 million of net annual expense savings and an undisclosed amount of revenue uplift from the deal.

Centerview Partners and Piper Sandler are advising Pinnacle while Morgan Stanley and Keefe Bruyette & Woods are advising Synovus.

Pinnacle shares were down more than 14%, to $89.36, at 1000 EST on July 25 while Synovus shares fell nearly 15%, to $48.34.