Home Economy PNC Deal Highlights Challenges of U.S. Market for European Banks

PNC Deal Highlights Challenges of U.S. Market for European Banks

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BBVA, headquartered in Madrid, is Spain’s second-largest lender but it lacked the capital to expand its footprint in the U.S.

BBVA, headquartered in Madrid, is Spain’s second-largest lender but it lacked the capital to expand its footprint in the U.S.

Photo: emilio naranjo/Shutterstock

Banco Bilbao Vizcaya Argentaria SA’s
sale of its U.S. operations to
PNC Financial Services Group Inc.
underlines that, for European banks, America is a tough nut to crack.

The problem for BBVA was that while it grew in the U.S. over a 15-year period, particularly in the southwest, it didn’t get big enough that it made sense to stay in the country. The second-largest Spanish lender lacked the capital to further expand its footprint and couldn’t ask shareholders—already struggling with its depressed share price—to put in more money.

Instead, BBVA signaled it will use the sale proceeds to increase its presence at home and in other core markets to scale up and boost profits. On Monday, following the U.S. sale announcement, BBVA said it was in merger talks with domestic peer
Banco de Sabadell SA
.

BBVA’s strategic shake-up shows how the coronavirus pandemic is forcing European banks to be more calculated about their prospects for growth and survival. Another duo of Spanish lenders,
CaixaBank SA
and
Bankia SA,
agreed to merge in September, and analysts and regulators are betting more will come, particularly in domestic European markets.

With the cash proceeds from the PNC deal—equating to 50% of BBVA’s entire market value—the bank could buy Sabadell and still have money left to buy back shares to boost its share price and satisfy shareholders. Sabadell’s market value stood at $2.8 billion Monday, according to the bank’s website, less than a quarter of what BBVA will get from PNC when the deal closes next year.

Analysts had flagged BBVA’s lack of scale in the U.S. before, as well as the possibility of a Sabadell tie-up. Sabadell’s shares, which have been hit along with other European banks’, are down some 60% this year.

Shares of BBVA closed Monday up 15%. Sabadell’s rose almost 25% before BBVA made its announcement after the market close.

BBVA was among the European banking giants that spread out across the world before the last financial crisis on a hunt for growth. It bought a small California bank in 2004 and expanded across Texas, Arizona and other Sun Belt states through a string of acquisitions. It and larger Spanish rival
Banco Santander SA
both kept sizable retail banks in both North and South America, even after other foreign banks exited in recent years.

But while BBVA was the number four bank in Texas by deposits, its market share, at 4.5%, was considered too small for strong returns.

Pittsburgh-based PNC said it agreed to buy BBVA’s U.S. operations for $11.6 billion. “This is a great transaction, one that is testament to our focus on generating value to our shareholders” said Carlos Torres Vila, BBVA executive chairman, adding the excess capital “provides lots of strategic flexibility.”

European banks were already struggling to make money under a low-interest rate environment and have been hard hit by the pandemic. Spain’s economy in particular has suffered as the spread of the virus has triggered months of lockdowns. A ban on dividend payments by European banking regulators further hit the stocks.

Some European bank executives say their aim is to come out of the current crisis with more viable operations than they started with, by making long-postponed decisions and scissoring businesses that can’t compete in the long term.

Mr. Torres Vila, in a conference call with analysts, declined to discuss any merger plans, but said in months ahead, and as economies recover from the pandemic hit, “We believe that there might be opportunities to reinforce the franchises where we have leadership positions.”

Bank executives and industry consultants say there are still benefits to being in different countries, such as diversifying earnings in different economies. The offsets can be multiple layers of regulation, local capital that can become trapped, and the difficulty of attaining adequate scale in multiple markets.

BBVA continues to bet in markets where it sees itself as big enough to succeed, including at home in Spain, and in Mexico and Turkey. Its market share in lending in those countries is 13%, 23% and 18%, respectively.

Other geographic retreats so far this year have included
HSBC Holdings
PLC’s shuttering of around one-third of its U.S. branches, and ABN Amro Bank NV curtailing its lending to corporate customers outside of Europe. Sabadell, BBVA’s potential acquisition target, has been considering ways to exit from the U.K. after buying a midsize bank there five years ago that has struggled for scale.

Write to Patricia Kowsmann at patricia.kowsmann@wsj.com and Margot Patrick at margot.patrick@wsj.com