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BB&T to Buy SunTrust in Decade's Biggest Deal: ETFs to Tap

Sweta Killa

A wave of consolidation in the banking sector triggered by regulatory changes, need for scale and race for technological innovation have started. This is especially true as BB&T Corp BBT has agreed to acquire SunTrust Banks Inc STI for $66 billion in an all-stock merger. The transaction represents the biggest bank deal since the 2007-2009 financial crisis (read: What Caused Huge Outflows in Regional Bank ETFs in November).

Inside The Deal

Under the terms of the deal, SunTrust shareholders will receive 1.295 shares of BB&T for each SunTrust share they own. BB&T shareholders will own roughly 57% and SunTrust shareholders will own around 43% of the combined entity. Additionally, SunTrust shareholders will receive a 5% increase in their dividend upon the completion of the deal.

The combination will create the sixth-biggest commercial bank in the United States with $442 billion in assets, $301 billion in loans and $324 billion in deposits with a customer base of around 10 million American households. The deal is said to be the “merger of equals,” combining the best of both companies to create the premier financial institution of the future.

In order to reflect equal contribution from both banks, the combined company will operate under a new name and brand that will be determined the deal closes in the fourth quarter. The combined company will be based in Charlotte, North Carolina, and its board and management will be evenly split between BB&T and SunTrust (read: Should You Buy Bank ETFs After Q4 Earnings?).

The transaction, approved by the boards of both the banks, will result in annual savings of around $1.6 billion by 2022, and would add 13% in GAAP earnings accretion in 2021 with 9% addition expected for SunTrust. Further, the merger is expected to generate an internal rate of return of approximately 18%. The deal is subject to approval from shareholders of both companies as well as regulators.

ETF Impact

Following the announcement of the merger, shares of SunTrust climbed 10.2% to close the day and crushed its average volume as nearly 24.7 million shares moved hands compared with 4.4 million on average. Meanwhile, shares of BB&T rose 4%. This has put the spotlight on bank ETFs that could be the best ways for investors to tap the opportunity arising from the biggest bank deal in a decade (see: all the Financials ETFs here).

iShares U.S. Regional Banks ETF IAT

This ETF offers exposure to 59 small and mid-cap regional bank stocks by tracking the Dow Jones U.S. Select Regional Banks Index. BB&T and SunTrust occupy the third and fourth spots at 7% and 4.9%, respectively. The fund has amassed $575.6 million in its asset base while sees a good volume of 258,000 shares a day. It charges 43 bps in annual fees and has a Zacks ETF Rank #3 (Hold) with a High risk outlook.

First Trust Nasdaq Bank ETF FTXO

This fund follows the Nasdaq US Smart Banks Index, which measures performance of U.S. companies within the banking industry. It holds 30 securities in its basket with BB&T at the top position at 8%, while STI is the tenth firm accounting for 4% share. The ETF has AUM of $172.9 million and trades in average daily volume of 619,000 shares. It charges 60 bps in annual fees and has a Zacks ETF Rank #3.

Invesco KBW Bank ETF KBWB

This fund provides exposure to the leading national money centers and regional banks or thrifts by tracking the KBW Bank Index. Holding 24 stocks in its basket, BBT and STI take the ninth and tenth spot, respectively, with nearly 4% share each. The fund has managed $671.5 million in its asset base and trades in solid volume of 378,000 shares per day on average. Expense ratio comes in at 0.35%. KBWB has a Zacks ETF Rank #3 with a High risk outlook (read: Why Bank ETFs Can Continue to Rise Despite Mixed Q4 Earnings).

SPDR S&P Regional Banking ETF KRE

With AUM of $2.8 billion, this fund offers exposure to 125 regional banks with the in-focus firms accounting for 1.6% share each. It follows the S&P Regional Banks Select Industry Index, charging investors 35 basis points a year in fees. The fund trades in heavy volume of 8.5 million shares a day on average and has a Zacks ETF Rank #3 with a High risk outlook.

SPDR S&P Bank ETF KBE

This fund offers equal-weight exposure to 85 banking stocks by tracking the S&P Banks Select Industry Index. BB&T and SunTrust make up for at least 1.4% share each. The ETF has amassed $2.6 billion in its asset base and charges 35 bps in annual fees from investors. The product trades in average daily volume of 2.9 million shares and carries a Zacks ETF Rank #3 with a High risk outlook.

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