Via Financial Times

PNC’s decision to sell its $17bn stake in BlackRock was prompted by the bank’s increasing fears over the US economy, chief executive Bill Demchak told the Financial Times.

The head of America’s seventh-largest commercial bank said the sale would give him a “bulletproof” balance sheet to deal with an extreme crisis or a war chest to buy distressed assets in a more moderate recession. 

“As we entered this crisis, it became clear that everything we thought we knew was proven incorrect,” Mr Demchak said of the deliberations that led the PNC to decide to end its long relationship with the world’s biggest manager. 

“We’re in this economy where everybody bases their models predicting the future on the past and of course we’ve never been in a situation where [we] effectively have been forced to shut down on the economy with this much fiscal stimulus.”

America’s banks set aside tens of billions of dollars in the first quarter to deal with potential loan losses. At PNC, first quarter loan loss provisions increased almost fivefold to $914m. 

“I can’t stress the importance of being able to play offence into that environment,” Mr Demchak said. “If you’re left in a situation where you’re defending, where you’re shrinking your balance sheet, where you’re worried about your capital, where you’re continually cajoling shareholders, or clients to stick with you, you’re not focused on growing.”

PNC said on Monday that it would sell its 22 per cent stake in BlackRock after 25 years, a move that will increase PNC’s common equity tier one ratio from 9.4 per cent to 11.4 per cent. That is well above the minimum 4.5 per cent ratio the bank is required to hold.

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PNC’s preferred option is to use the extra capital to buy another bank at an attractive valuation, — something Mr Demchak said was more likely in the future than in the recent past. Recent acquisitions have demanded high prices or been mergers of equals, such as when BB&T combined with SunTrust last year to create a bank just bigger than Mr Demchak’s.

“Even if credit losses aren’t that severe [during the Covid-19 crisis], the earning potential of banks at a zero rate environment, with all the necessary cost that we had before we got into this, is going to be pretty tough,” he said. “Boards are going to have some realistic discussions [about potential sales].” 

A banker familiar with PNC’s strategy said that the US arms of European banks such as HSBC and Santander could be attractive targets if their parents needed capital to prop up ailing domestic operations.

Mr Demchak said he did not have a fixed target in mind. “I think there’s going to be opportunities, but it always surprises us in terms of what shows up. We need to watch and hang around the hoop to see how this plays out.”

The bank would not set an “artificial boundary” on the size of a potential acquisition to avoid moving into a regulatory category that requires more capital, Mr Demchak added.

Mike Mayo, analyst at Wells Fargo, said the BlackRock sale reflected PNC’s “bearish” outlook and was a “savvy” move by Mr Demchak.

“Remember this is the CEO who led the takeover of National City at 40 per cent of tangible book during the great financial crisis — an incredible deal,” Mr Mayo said.

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Scott Siefers, analyst at Piper Sandler, said PNC would do “much better waiting in the wings for negative news to hit and swooping in when valuations are low”. A necessary condition was that “someone has to be willing to sell at 60 or 70 per cent of book” value — and there was no guarantee that anyone would be.

In the meantime, the sale of the BlackRock stake will deprive PNC of about 15 per cent of its annual earnings, according to analysts at Autonomous. 

“If we end up in a situation where the economy comes roaring back, we’re going to be left with diluted earnings and excess capital,” Mr Demchak said. “If things are bad or mildly bad or really bad, we have an outsized opportunity to go into this with eyes wide open.”