Coronavirus disrupts Truist merger timeline as bank readies branch closures

When BB&T and SunTrust merged in 2019 to form Truist, management set ambitious goals that underscored why the biggest bank merger since the financial crisis made sense to investors.

Hundreds of the two banks’ branches located near each other would close, back office and information-technology systems that badly needed upgrades would get them and duplicate positions would get the ax. Executives said that by 2022 investors would see $1.6 billion in net savings.

But after the novel coronavirus hit, that goal is getting harder to reach on time.

Even before the pandemic started, the bank reduced how much it expected to save by 2020 and 2021, but held its 2022 goal. Analysts say that they still expect the bank to reach its cost-saving goal, but its ambitious timeline may be in jeopardy.

In its first quarter earnings in April, the Charlotte-based bank didn’t change its forecast for the merger’s cost cuts. At a Thursday conference hosted by the British bank Barclays, Truist CEO Kelly King acknowledged that “we have had some minor setbacks in terms of progressing,” in the merger.

“Any change, if we were to have any, it would be in a relatively minor category,” King said. “There’s no discussion in terms of any major setbacks. And to be honest, I think we have a decent chance that’s kind of staying on track.”

Already, the bank has cut a net 800 positions in what it said were duplicate roles in management, administration and support that didn’t face customers. Truist also consolidated its real estate footprint, moving into office space that the bank owns.

Branch closures

The biggest cost cut is yet to come. Starting in the third quarter, the bank will begin shedding branches, beginning the process of one of the largest closures of a single bank’s branches in U.S. history.

The sale of 30 branches to First Horizon Bank, a regulatory requirement of the merger, is slated to go through in the third quarter, and then the mass consolidation of branches will begin in January 2021.

Hundreds of its nearly 3,000 branches will be shuttered, a major provision of the merger. Strip malls across the South feature a SunTrust and a BB&T near each other: one of the branches won’t be needed anymore. The bank has not yet said which branches it will close.

To get the merger approved by federal regulators, Truist did agree to limits on the closures. The bank won’t close any branches in communities with a population of 2,500 or less for three years, and will open some branches in working class or majority-minority areas.

But despite the regulators’ thumbs-up, mass closures in a recession still is a rough look for any company.

“Just the idea of branch closures in this environment is a little tenuous,” said Piper Sandler analyst Stephen Scouten.

While fewer products sold by bankers in a pandemic means some portions of the merger will be sped up, Scouten thinks the real estate and branches portion of the merger will be slowed down.

In addition to navigating the merger, the bank also has to make it through the financial effects of the coronavirus. The bank set aside about $900 million in its April first quarter earnings to brace for coming defaults of people or companies now unable to make loan payments.

While the old BB&T balance sheet was considered one of the safest in banking, the COVID-19 pandemic is testing all banks with higher expected defaults and some higher expenses. Truist paid about 78% of its workers a $1,200 bonus to handle the pandemic, contributing to a $62 million bill for COVID-related personnel expenses in the first quarter.

A lawsuit from a North Carolina credit union over the new name, which the credit union thinks is too similar to its own, has also become an distraction for the bank.

Merging systems

Ultimately, the merger is done and it’s not going to be unwound. The greatest extent of the risk is if things get materially worse for Truist and the rest of Wall Street: a shifting timeline for cost cuts could evolve into more substantial changes to the bank’s playbook.

“COVID-19 has clearly impacted the timing of certain cost savings and has resulted in a process that isn’t as smooth as it could’ve been,” said Terry McEvoy, an analyst at Stephens.

One of McEvoy’s concerns is the systems infrastructure at the bank.

Upgrading them was a key tenet of the merger. The importance of that was put in contrast when the legacy BB&T and SunTrust online banking systems both collapsed in April. It was the day federal stimulus checks arrived in some bank accounts and customers checked their accounts en masse, overwhelming bank systems.

“When you’re running two systems and you convert them, if there is a delay you are likely going to have some higher expenses,” he said.

This story was originally published May 18, 2020 at 11:00 AM.