Analyst Note| Eric Compton, CFA |
U.S. Bancorp has announced that it will acquire Union Bank from Mitsubishi UFJ Financial Group (MUFG). Union Bank is a diversified bank with retail and commercial operations on the west coast, concentrated in California, with some additional presence in Washington and Oregon. This deal continues a trend we have seen of U.S. banks acquiring the U.S. operations of a foreign bank where those U.S. operations have historically struggled, and where the U.S. acquirer is in a position to extract more value from those assets. Cost savings usually play a big role, and this acquisition is no different, with U.S. Bancorp set to cut out 40% of the target’s existing cost base. Based on financials provided by U.S. Bancorp, this implies the bank can improve Union Bank’s efficiency ratio from nearly 80% to sub-50%. This also implies that U.S. Bancorp can improve returns on tangible equity from sub-cost of capital to closer to 17%. The purchase price is very reasonable, at roughly 1.3 times tangible book value and 7.7 times synergized earnings, and we believe this price allows the bank to create value from cost synergies alone. We think additional earnings and some eventual earnings growth from the franchise could add additional value over time. Based on this announcement, we plan to raise our fair value estimate for U.S. Bancorp by roughly 2%-5%, or roughly $1 to $3 dollars per share, as we more fully incorporate this into our models.