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Bank ETFs Rise on Merger Speculations

Sanghamitra Saha

The beleaguered financial sector, one of the hardest-hit amid the pandemic, picked up on May 14 on speculations that Goldman Sachs GS is looking for banks that could be lucrative acquisition targets, per media reports.

The potential candidates include Wells Fargo WFC, The PNC Financial Services Group, Inc PNC and US Bancorp USB. In fact, Wells Fargo (WFC) gained as much as 6.8% on May 14 while PNC added 1.1% and US Bancorp jumped 5.8%.

Goldman’s market value of about $60 billion is way below J.P. Morgan Chase’s about $267 billion. Speculation is rife that to compete with J.P. Morgan, Goldman Sachs is exploring options for inorganic expansion. Large entities can always offer corporate clients more variety of services.

Bank mergers have been rife in recent times, with 40% of U.S. banks having disappeared since the financial crisis, largely due to industry consolidation.

How Fit is Wells Fargo as an Acquisition Target?

Wells Fargo is trading nearly 70% off its 2018 high and is slipping to levels not seen since the 2008 financial crisis. However, a JPMorgan analyst note published on Thursday morning called the merger-and-acquisition speculation "a non-starter due to deposit regulation [and] Wells Fargo's asset cap," quoted on business insider.

In response to the 2016 Wells Fargo account opening scandal, the Fed imposed an asset cap of $1.952 trillion for the bank. As of Mar 31, Wells Fargo crossed that limit and has no scope to add more assets through mergers.

Despite a selloff, Wells Fargo’s stock seems extremely overvalued with a forward P/E of 28.6x versus 14.8x offered by Banks-Major Regional Market.Debt/Equity ratio is 1.47x versus 1.08x of the major regional banks.

What AboutPNC Financial?

PNC shares have lost 38.7% year to date. Shares are trading at a forward P/E of 16.4x. Notably, the company has temporarily suspended share buybacks, to enhance liquidity amid virus concern. Debt/Equity ratio is 1.49x versus 1.08x offered by major regional banks. Lack of diversification in the loan portfolio is concerning.

Meanwhile, PNC recently offloaded its full 22% stake in the asset management company BlackRock (BLK) in order to explore other investment opportunities. This indicates PNC’s efforts for restructuring and its likely hunt for a suitor.

U.S. Bancorp Looks Cheapest Among the Trio

Forward P/E of the bank is 13.2x, lower than the sub-industry. Debt as a percentage of equity is reasonable at 113.3% versus 108.9% of the major regional banks. Though U.S. Bancorp’s solid business model, core franchise and diverse revenue streams are likely to support its performance, significant exposure to commercial loans is a concern amid the current pandemic-related crisis. The bank has temporarily suspended share buybacks through the second quarter of 2020 following the COVID-19 outbreak.

ETFs in Focus

Deal or no deal, the news boosted bank ETFs on May 14. SPDR S&P Bank ETF KBE gained 3.6% on the day and added 0.3% after hours. Invesco KBW Bank ETF KBWB, iShares U.S. Regional Banks ETF IAT, First Trust Nasdaq Bank ETF FTXO and SPDR S&P Regional Banking ETF (KRE) advanced about 4%, 3.3%, 3.4% and 3.2%, respectively, on May 14.

PNC has 13% exposure to IAT and 4.5% focus on KBWB and FTXO. U.S. Bancorp has 12.8% focus on IAT, 7.4% exposure to KBWB. Wells Fargo has about 6% exposure to KBWB and FTXO each, while Goldman Sachs has 15.7% focus on iShares US Broker-Dealers ETF IAI. Given this, investors should keep a close tab on the ETFs mentioned earlier.

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U.S. Bancorp (USB) : Free Stock Analysis Report
 
The Goldman Sachs Group, Inc. (GS) : Free Stock Analysis Report
 
The PNC Financial Services Group, Inc (PNC) : Free Stock Analysis Report
 
Wells Fargo Company (WFC) : Free Stock Analysis Report
 
SPDR SP Bank ETF (KBE): ETF Research Reports
 
iShares U.S. BrokerDealers Securities Exchanges ETF (IAI): ETF Research Reports
 
iShares U.S. Regional Banks ETF (IAT): ETF Research Reports
 
First Trust NASDAQ Bank ETF (FTXO): ETF Research Reports
 
Invesco KBW Bank ETF (KBWB): ETF Research Reports
 
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