4 Euro Crisis Targets in U.S. Banks' Crosshairs

NEW YORK ( TheStreet) -- Four large European bank U.S. subsidiaries could be on the block following downgrades of 16 Spanish banks by Moody's Investor Service.

The downgraded Euro holding companies would not be "forced sellers," since they all have excess capital, according to Bank of America Merrill Lynch analyst Erika Penala, who said in a report on Tuesday that the European holding companies "would only part with their US franchises on attractive terms."

While it would be a pretty obvious play for European holding companies to shore up their capital by selling their strongly capitalized U.S. subsidiaries, Basel III rules may require banks "to fulfill liquidity requirements in a currency by currency basis, which would put a premium on U.S. denominated deposits for European banks," Penala said.

Investors have seen several large recent deals involving U.S. subsidiaries of foreign holding companies, including Capital One's ( COF) purchase of ING Direct (USA) from ING Groep ( ING) in February for roughly $9 billion in cash and stock, which was followed on May 1 by the purchase of HSBC's $30 billion U.S. credit card portfolio for a premium of $2.6 billion.

On Friday, First Niagara Financial Group ( FNFG) of Buffalo, N.Y., expects to complete its purchase of roughly 200 HSBC branches, in a complicated deal that has included the sale of roughly 100 branches by First Niagara.

Leaving aside foreign-owned U.S. banks held by non-European companies and HSBC, here are the four largest U.S.-based foreign subsidiaries that could be on the block:
  • RBS Citizens, NA of Providence, R.I., is a subsidiary of Citizens Financial Group, which in turn is held by Royal Bank of Scotland Group PLC (RBS). The U.S. bank subsidiary had $106.9 billion in total assets, with over 1,500 branches in 12 states, while the U.S. holding company has roughly $132 billion in assets. RBS Citizens, NA was strongly capitalized as of March 31, with a Tier 1 leverage ratio of 10.09% and a total risk-based capital ratio of 13.09%, according to data supplied by Thomson Reuters Bank insight. These ratios need to be at least 5% and 10%, respectively, for most U.S. banks to be considered well-capitalized by regulators. Among the four banks listed here, "a sale of Citizens to a US regional bank appears to be the least likely," according to Penala, because of the size of the bank and what might be an "unattractive" price for RBS.
  • Sovereign Bank, NA of Wilmington, Del., is a subsidiary of Santander Holdings USA, which in turn is held by Banco Santander, SA (STD). The U.S. subsidiary bank had $78.2 billion in total assets as of March 31, with a Tier 1 leverage ratio of 11.15% and a total risk-based capital ratio of 16.45%. Penala said that a deal for Sovereign "would give an acquirer a sizeable presence in the Northeast, given the bank's number three market share in Massachusetts, number four market share in Pennsylvania and number seven market share in New Jersey."
  • Compass Bank of Birmingham, Ala., is a subsidiary of BBVA Compass Bancshares, which in turn is held by Banco Bilbao Vizcaya Argentaria, SA (BBVA).

    The U.S. bank subsidiary had $63.1 billion in total assets as of March 31, with a fourth-place deposit market share in Texas, which Penala said "may be the most coveted asset" of the four U.S. subsidiary banks listed here. Compass Bank had a Tier 1 leverage ratio of 8.83% as of March 31, with a total risk-based capital ratio of 14.24%.
  • Bank of the West of San Francisco is a subsidiary of BancWest Corp., which in turn is held by BNP Paribas SA. Bank of the West had $$62.4 billion in total assets as of March 31, with a Tier 1 leverage ratio of 11.57% and a total risk-based capital ratio of 15.45%.

The following are three U.S. bank holding companies that may be eager bidders for one or more of these four subsidiaries of foreign bank holding companies:

U.S. Bancorp
Shares of U.S. Bancorp ( USB) of Minneapolis closed at $30.65 Thursday, returning 14% year-to-date, following a 2% return during 2011. Based on a quarterly payout of 19.5 cents, the shares have a dividend yield of 2.54%.

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The shares trade for three times tangible book value, according to Thomson Reuters Bank insight, and for 10 times the consensus 2013 earnings estimate of $3.01 a share, among analysts polled by Thomson Reuters. The consensus 2012 EPS estimate is $2.77.

U.S. Bancorp has been one of the strongest performing large banks right through the credit crisis. Over past five quarters, the company has achieve returns on average assets (ROA) ranging from 1.36% to 1.61%, according to HighlineFI.

With "an attractive footprint across the western United Stated including the number seven market share in California and number one market share in Hawaii," Bank of America Merrill Lynch analyst Erika Penala said on Wednesday that Bank of the West would be a natural fit for U.S. Bancorp, which could "offer BNP Paribas an attractive sale price, as by our analysis USB could afford to two times tangible book value and still earn strong returns."

Penala also said that U.S. Bancorp could be a bidder for RBS Citizens, although a bid of over 1.25% of tangible book value would be unattractive for a U.S. acquirer, while "BofA Merrill Lynch analyst Bank Michael Helsby believes that RBS would be unlikely to sell Citizens if the top bid was 1.25x TBV."

Penala rates U.S. Bancorp a "Buy," with a $33 price target, estimating the company will earn $2.80 a share this year, followed by 2013 EPS of $2.98.

Interested in more on U.S. Bancorp? See TheStreet Ratings' report card for this stock.

BB&T
Shares of BB&T ( BBT) of Winston-Salem, N.C., closed at $30.11 Thursday, returning 21% year-to-date, following a 2% decline last year. Based on a quarterly payout of 20 cents, the shares have a dividend yield of 2.66%.

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The shares trade for twice their tangible book value, and for 10 times the consensus 2013 EPS estimate of $3.02. The consensus 2012 EPS estimate is $2.69.

Along with U.S. Bancorp, BB&T covets an increased presence in the Texas market, which "has been a targeted area of growth for the company," according to Penala, who added that "an acquisition of Compass would give BBT additional scale in Alabama ($8.5bn in deposits, $4.5bn for BBT) and Florida ($1.9bn in deposits, $16bn for BBT) and generate cost synergies for BBT (we estimate 21%)."

Penala also said that "deal economics could be attractive," estimating that if BB&T were to pay 1.25% of tangible book value for Compass, "it would see 19% EPS accretion with a 43% internal rate of return and 11% tangible book value dilution."

With the possibility of a competitive bidding process for Compass, "it is possible that BBT could pay as much as 1.5x TBV for Compass, especially when considering the strategic merits of the deals."

Penala has a neutral rating for BB&T, with a $33 price target, estimating the company will earn $2.78 a share during 2012, followed by 2013 EPS of $3.02.

Interested in more on BB&T? See TheStreet Ratings' report card for this stock.

PNC Financial Services Group
Shares of PNC Financial Services Group ( PNC) of Pittsburgh closed at $61.64 Thursday, returning 8% year-to-date, following last year's 3% decline. Based on a quarterly payout of 40 cents, the shares have a dividend yield of 2.60%.

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The shares trade for 1.4 times tangible book value, and for nine times the consensus 2013 EPS estimate of $6.89. The consensus 2012 EPS estimate is $6.19.

Penala said that "PNC has the proven ability to integrate transformational deals, but lower relative currency and Basel III capital strength could translate into sizeable equity offerings" to fund a major acquisition.

The analyst added that "PNC potentially would be the most likely suitor for Sovereign, as an acquisition would allow PNC to expand its footprint in the Northeast while allowing PNC to recognize significant cost saves in the Mid-Atlantic," but on the other hand, "pricing discipline will be key, as deal economics become unattractive if PNC pays more than 1.25x TBV," besides which, "PNC might prefer to enhance its newly acquired Southeast footprint from the company's acquisition last year of RBC Bank (USA) over expanding in New England."

While stressing that a sale of Citizens Financial Group by RBS was unlikely because of a high asking price, Penala said that "a PNC/Citizens deal could make sense to PNC," with estimated cost savings of "31% given the overlapping footprints" and because "it would allow PNC to strengthen its footprint in Ohio, Michigan and Illinois while expanding its footprint in the Northeast."

Penala rates PNC a "Buy," with a $66 price target, estimating the company will earn $6.65 a share this year, followed by 2013 EPS of $6.75.

Interested in more on PNC Financial Services Group? See TheStreet Ratings' report card for this stock.

-- Written by Philip van Doorn in Jupiter, Fla.

To contact the writer, click here: Philip van Doorn.

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Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.

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