Fifth Third's $11 Billion Comerica Grab: What It Means for Investors

The Cincinnati-based Fifth Third Bancorp (NASDAQ: FITB) shook up the regional banking landscape a month ago by announcing a $10.9 billion acquisition of the Dallas, Texas-based Comerica (NYSE: CMA). The all-stock deal continues a run of bank deals that are starting to kick into high gear as the Trump administration opens the flood gates for bank mergers and acquisitions (M&A).

The deal will create the ninth-largest bank in the U.S., with $288 billion in assets. The acquisition gives Fifth Third the No. 1 retail-deposit franchise in Michigan, while also helping the bank continue its expansion in fast-growing markets such as Texas.

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Once the acquisition closes, the pro forma bank will have over two-thirds of its loan book in commercial real estate and commercial and industrial loans. It will also run other strong fee businesses in commercial payments and asset and wealth management.

Last year, Comerica lost a contract with the U.S. Department of Treasury managing the agency's Direct Express program, where it helped the agency distribute federal benefits through pre-paid cards. The contract provided the bank with roughly $3 billion in non-interest-bearing deposits, essentially free funding that the bank could use to originate loans or buy securities. The Treasury Department then awarded the contract to Fifth Third.

Why the deal makes sense for investors

Most bank investors aren't big fans of bank acquisitions and mergers, especially large ones like this. They can be difficult to integrate and typically involve the immediate destruction of the acquirer's equity, which must be earned back through strong execution.

But Fifth Third said the acquisition of Comerica will not be dilutive to tangible book value or the bank's net worth, which is a big positive. Fifth Third plans to cut about 35% of Comerica's expenses, which is high but not out of the ordinary when it comes to bank acquisitions. The acquisition is also expected to be 9% accretive to earnings in 2027 and result in a 22% internal rate of return, assuming no revenue synergies.

Management also expects the acquisition to improve Fifth Third's return profile, boosting the bank's return on assets to 1.3% to 1.4% and return on tangible common equity (ROTCE) to an attractive 19% or higher.

The deal doesn't come without challenges. Fifth Third will face the difficult task of integrating two large and sprawling institutions. Management will also attempt to fix issues at Comerica, a bank that hasn't grown loan balances in roughly 10 years. However, banks of Fifth Third's size are more or less in no-man's land -- too small to compete with giants like Bank of America but big enough where regulation and tech demands are significant and require more scale.

The time to make a big deal and grow is now when there's a friendly regulatory regime in place that's essentially promoting consolidation within the industry. The fact that Fifth Third made a big deal without destroying tangible book value should be looked upon favorably.

Bank of America is an advertising partner of Motley Fool Money. Bram Berkowitz has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.