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Stock Market News: BB&T-SunTrust Merger Brings Back Too-Big-to-Fail Critics

Dan Caplinger, The Motley Fool

The stock market lost ground on Thursday morning, as investors returned to a more nervous stance about the state of the global economy and the likely responses from central banks to keep it moving forward. As of 11:10 a.m. EST, the Dow Jones Industrial Average (DJINDICES: ^DJI) was down 234 points to 25,157. Among broader market indexes, the S&P 500 (SNPINDEX: ^GSPC) fell 29 points to 2,703, while the Nasdaq Composite (NASDAQINDEX: ^IXIC) took an 87-point hit to 7,289.

Earnings season continued to provide spot reports on the state of the economy, but the biggest piece of news for the market this morning came from the banking sector. Just 10 years after the financial crisis that brought the banking system to its knees, regional banking giants BB&T (NYSE: BBT) and SunTrust Banks (NYSE: STI) announced a merger that will create the sixth-largest bank in the U.S. market. That in turn raised new concerns that the era of too-big-to-fail financial institutions might be coming back into vogue at a critical time for the markets.

Silver-colored bank vault with the door open and bars visible inside.

Image source: Getty Images.

The mechanics of the deal

BB&T is based in North Carolina, with more than 2,000 bank branches in 15 states, spread largely across the Southeast. With about $161 billion in deposits and $147 billion in loans, BB&T is a key player in one of the fastest-growing regions of the country.

SunTrust, meanwhile, calls Atlanta its home. With deposits of $162 billion and loans of around $150 billion, the two banks are roughly comparable in size, but it has a relatively smaller network of branch locations spread across 11 states in the Southeast.

Under the terms of the deal, SunTrust shareholders will receive 1.295 shares of BB&T stock for every SunTrust share they own. In the end, that'll give SunTrust investors a 43% stake in the combined company, with the remainder of 57% remaining in the hands of current BB&T investors. Despite being called a merger of equals, SunTrust stock got the bigger boost from the deal announcement, as shares rose 8% compared to just a 1% upward move for BB&T stock.

The benefits of a big bank merger

BB&T and SunTrust have high hopes for the transaction. The two see the post-merger bank, which will have a new name and brand, having leading market share in the most attractive Southeast markets. It'll serve more than 10 million households and have roughly $300 million in loans, $325 billion in deposits, and $440 million in total assets. The banks will create a new headquarters in Charlotte, North Carolina -- the home of Bank of America, perhaps not so coincidentally -- while retaining their existing presences in Winston-Salem and Atlanta.

Both bank CEOs pointed to big advantages from the combination. The banks share a dedication to customer service and community banking, and they have strong financial metrics. Greater scale should open up new profit opportunities, and complementary businesses could benefit from each other's customer bases.

Why critics are concerned

Of course, some believe that the big-bank merger is a step in the wrong direction. After having learned the lessons of having concentrated exposure to financial challenges during the late 2000s, some see the merger as returning to the errors of the past.

Yet as Bank of America and other top financial institutions have used their size to enter into consumer markets, competition has gotten tougher for regional banks. Many believe that combinations are the only way to stand up to the giants of the industry, especially given the need to spend large amounts to invest in technology like mobile banking apps and electronic transaction capabilities.

Meanwhile, consumers shouldn't expect immediate changes. With the deal not even expected to close until toward the end of 2019, it could be several years before the two banks start actively moving customers into products bearing their new brand identity. Yet to build goodwill, starting the process of unifying ATM networks and bank branches could be a smart move for SunTrust and BB&T to make sooner rather than later.

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Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.