When will Fifth Third make a major acquisition?

Just as Fifth Third is shrinking its footprint, mergers are heating up among large regional banks.

North Carolina-based BB&T this year completed two acquisitions – including the takeover of Bank of Kentucky that brought it into Greater Cincinnati – and it just announced a third that will add another 124 branches. Last month, Cleveland's Key Bank announced a $4.1 billion takeover of First Niagara that will make it bigger than Fifth Third. Also last month, East Coast-based New York Community Bancorp announced it will merge with Astoria Financial, creating the nation's 35th-largest bank.

Banking industry consolidation has been going on for years, but analysts say large regional banks – sometimes called "super-regionals" with several hundred branches in half a dozen or more states – have been mostly sidelined since the 2008 financial crisis as regulators forced them focus on improving their financial strength. Now that's changing as some of the nation's 50 largest banks are getting in on action.

But while a recent spate of deals may be the beginning of a feeding frenzy, Fifth Third looks like it's going on a diet.

In summer, the Downtown Cincinnati-based regional bank said it would shed 8 percent of its 1,300 branches. Since then, Fifth Third said as part of the branch trimmings it wouldl exit Pittsburgh and St. Louis markets, shrinking its geographic footprint from 12 to 10 states. And while Fifth Third's balance sheet is strong, analysts say the bank's downtrodden stock might prevent it from securing potential deals.

"Fifth Third has the capital and growth, but its stock multiple doesn't give it much pricing power to make acquisitions," said Scott Siefers, an analyst with Sandler O'Neill in New York.

Fifth Third buys stake in consumer insights firm

Bigger banks now are making bigger deals

For years after the financial crisis, the nation’s largest banks have been frozen out of big mergers as regulators subjected them to stress tests designed to safeguard them against another Lehman Brothers or Wachovia Bank failure that shook the financial system to its core.

But analysts say the pressure from regulators is letting up: Dodd-Frank financial reform was passed; new regulations have been written; banks have been through years of annual stress tests; and most banks have significantly improved their financial strength.

The fact that regulators haven’t stopped recent escalating deal-making by major regional banks is a sign that federal officials are more open to mergers, analysts say.

"Super-regional banks were required to raise capital after the crisis and now they're starting to see M&A (mergers and acquisitions) pick up," said Marty Mosby, an analyst with Vining-Sparks in Memphis. "New consolidation among large regional banks is just starting to take place."

Two regional banks leading the charge are BB&T and Key.

In November 2014, Winston-Salem-based BB&T announced it would acquire Lititz, Pennsylvania-based Susquehanna Bank for $2.5 billion. The deal, which closed earlier this month, gave BB&T 245 new branches in Pennsylvania, Maryland, New Jersey and West Virginia and boosting total bank assets by 10 percent to more than $200 billion.

Besides gobbling up Bank of Kentucky’s 32 branches this spring, BB&T followed up with another major acquisition: buying Allentown’s National Penn Bank for $1.8 billion, giving it another 124 branches in Pennsylvania, New Jersey and Maryland and another $9.6 billion in assets.

All told, BB&T’s three recent deals added a combined 400 branches and $30 billion in assets – enabling the bank to grow 16 percent larger in little more than a year in an industry dogged by sluggish growth prospects.

Cleveland-based Key stands to grow by one-third in one transformative transaction: buying Buffalo, New York-based First Niagara. Key will pick up 394 branches in New York, Pennsylvania, Connecticut and Massachusetts and $39 billlion in assets.

Once completed in the fall of 2016, Key will have $135 billion in assets and 1,366 branches in 15 states.

Terry McEvoy,an analyst at Stephens in Little Rock Arkansas, said the deals by BB&T, Key and others signal more consolidation to come.

"It's a very clear sign that bank acquisitions promise to get larger in 2016 as super regionals get back into M&A after hanging on the sidelines," McEvoy said.

Fifth Third sheds more branches

Fifth Third's rich history of acquisitions and its future

Fifth Third has made it no secret that it would consider future acquisitions, but analysts say its stock price will force it to be picky. The bank's last major acquisition was its $1.1 billion First Charter deal in 2007, which added almost 60 branches in North Carolina and $4.9 billion in assets.

Fifth Third Bancorp became the nation's 15th largest bank through a string of deal-making from 1991 to 2007 under former CEO George Schaeffer, who grew the bank with $8 billion in assets and 214 branches in Ohio, Kentucky and Indiana to 1,200 branches in 12 states with $110 billion in assets by the time he retired.

But toward the end of Schaefer's tenure, Fifth Third felt the strains of its breakneck expansion. As the bank grew larger, the pool of takeover targets that could keep moving the needle on growth shrank. Fifth Third also ran afoul of regulators and was at one point barred from making additional deals.

As Fifth Third's winning streak cooled, so did its stock price – taking away one of its most powerful acquisition tools. Fifth Third's stock in the 1990s and early 2000s was so highly valued that takeover targets readily accepted it in exchange for their own shares.

Analysts now say Fifth Third's stock price – trading at 11 times earnings – now trades at a discount to peers, making it weak currency for takeovers and difficult to replicate those glory years.

Last month, incoming CEO Greg Carmichael said on an earnings call that Fifth Third was focused on growing its existing business to drive revenue growth. He barely mentioned potential acquisitions, although he repeated Fifth Third would consider potential bank acquisitions where the company could increase market share in its footprint.

"That's tough to say... Any time there's an opportunity to create long-term shareholder value, we're going to take a look," Carmichael said. "But there's really no change to our core strategy around M&A."

Carmichael added the company wasn't just looking at retail banking acquisitions, but might consider deals to beef up its technology operations. Last week, Fifth Third announced acquiring for an undisclosed sum a minority stake in Zipscene, a local consumer insights firm that serves restaurant clients. The bank say the investment would help it grow its payments and solutions business.

Analysts say the best way for Carmichael to boost Fifth Third's stock – and its ability to make acquisitions with shares – is to focus controlling costs and boosting profits. Fifth Third's retreat from Pittsburgh and St. Louis, where it doesn't have significant market share, may help.

Tom Mitchell, an analyst with Miller Tabak in New York, said Fifth Third's stock and fortunes may rise with the economy and interest rates that are expected to begin increasing as early as next month. A growing economy creates more demand for the lending business and higher interest rates will make new loans more profitable.

"They are not in a bad position to make acquisitions," Mitchell said. "I think there will be opportunities."