Flush with capital from the sale of its stake in BlackRock, PNC Financial Services Group in Pittsburgh is willing to go big on an acquisition that would vault it into the ranks of the nation’s five largest banks.
Speaking at an investor conference hosted by Morgan Stanley, Chairman and CEO William Demchak said Tuesday that the $445 billion-asset company would be open to a large deal that would boost assets to more than $700 billion. If it could swing such a deal, PNC would become larger than two of its biggest rivals, the $506 billion-asset Truist Financial and the $543 billion-asset U.S. Bancorp.
“We could cross [the $700 billion-asset mark] but we have to see what the returns are and obviously the price,” Demchak said.
Still, he said PNC is in no rush to do a deal because no one is really sure what long-term impact the coronavirus pandemic will have on the economy.
“We will be patient,” he said. “This hasn’t begun to play out in our economy in terms of what the impacts are and what the opportunity set will be that comes out of it.”
What PNC does with the $5 billion reaped after taxes from the BlackRock sale completed in May has been an object of speculation for analysts.
Demchak said he would be wary of taking on a bank that is overly reliant on consumer loans and that he’d be more interested in buying a bank with higher concentrations of commercial and industrial and commercial real estate loans. If loan losses start to rise due to the weakening economy, his team has more experience working through those types of assets, he said, pointing to PNC’s 2008 acquisition of National City and 2012 deal for Royal Bank of Canada’s U.S. operation as examples.
“We don't have an inherent bias against consumer, except for the fact that most of the consumer institutions who show up for sale end up having had a weak franchise to begin with and, therefore, would rely on us to have a capacity to fix it,” Demchak said. “And that I'm hesitant on, because we are not the expert fixer of a subprime lender in consumer. That isn’t our background.”
Demchak said the economic downturn from the coronavirus pandemic could work in a buyer’s favor as banks that are facing higher credit and technology costs may look to sell.
“It's not going to be a lot of fun to be a bank,” Demchak said. “The day we announced [the BlackRock sale], it's fascinating how many phone calls I got just to say, ‘Hey Bill, how are you doing?’ I mean it has to be on everybody's mind. What do you do if you're a bank in this COVID environment?”
Demchak said PNC would gauge any deal on its “ability to replace the earnings from BlackRock with the capital generated from BlackRock” and that any acquisition would likely be done with both capital and stock.
PNC owned a 22.4% stake in BlackRock, the world’s largest asset manager, but sold it to strengthen its capital levels and protect itself from a potentially prolonged economic downturn.
"Of course, had I known the market was going to rip another 15%, we would have gotten more dollars for it,” Demchak said, referring to the stock market rally since PNC announced the sale in mid-May. “But hindsight is always 2020.”