Bank ETFs Rise On Merger Speculations

The beleaguered financial sector, one of the hardest-hit amid the pandemic, picked up on May 14 on speculation 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 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 About PNC 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.

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