Despite improving market conditions, PNC CEO has not changed his approach to mergers and acquisitions
Since the coronavirus pandemic first plunged markets, assets of $ 462 billion PNC Financial Services Group (NYSE: PNC) based in Pittsburgh sought to make a game-changing acquisition. The bank sold its $ 14 billion stake in the asset management company Black rock (NYSE: BLK) in May, and PNC CEO Bill Demchak publicly stated that the primary purpose of the sale was to build up capital that could potentially be used for opportunistic action in the tough environment for banks.
But six months later, credit has held up better than expected, in large part thanks to the stimulus. Bank valuations have improved and many bankers are now ruling out worst-case economic scenarios. While the banking environment has improved, Demchak does not appear to have changed his patient approach when it comes to reviewing potential mergers and acquisitions (M&A).
The same philosophy
Since the start of acquisition talks, Demchak has said he would like to purchase another Bank which helps the company establish a national retail banking presence specializing in commercial and industrial loans (C&I). Many investors wondered why the bank was not considering buying a consumer credit or credit card company that could perhaps improve its net interest margin in a low rate environment. Like most banks, PNC’s net interest margin, the difference between what it earns on interest-bearing assets such as loans, and what it pays on interest-bearing liabilities such as deposits, fell significantly this year – up to 2.39%. at the end of the third trimester. Although PNC has a portfolio of consumer loans with credit card, auto and student loans, these are primarily residential mortgages and standard home equity loans.
At the Bank of America Future of Financials conference held earlier this month, Demchak said he does not see consumer credit as a strategic opportunity for PNC. “Most of the consumer credit companies that come into the market for sale are down,” he said. “Our ability to fix a large failed consumer credit business on a large scale – you might know we can do that – but I would have a lot more confidence in our ability to fix a C&I franchise.” Demchak added that while you never say never, over time he doesn’t see consumer credit as a great return on capital.
I think that’s a fair point. Demchak basically says he likes the business PNC is running now and thinks it can generate good returns in the long run. While the low interest rate environment and the potential for many future loan losses from the pandemic make it difficult for banks, the industry has really been operating in a low interest rate environment since the Great Recession, and PNC has been able to generate solid returns. on equity.
Not phased by rising valuations
Demchak also did not seem phased by the increase in bank valuations. The pandemic at the start of the year pushed many banks down, ultimately trading at a substantial discount from tangible book value. This is one of the reasons PNC has been so keen to act, because in this kind of environment, acquirers would not need to pay such a high premium for another bank. During the Great Recession, PNC bought National City Corp. for $ 7 billion less than the bank’s tangible book value, and the deal was seen as a major success for the bank.
In recent months, bank valuations have risen. On the recent news of Pfizer (NYSE: PFE) from its first successful vaccine trials, bank stocks surged. If it’s good for the industry, it makes acquisition targets more expensive. This might leave some wondering if it’s still worth it for PNC to make a big buy, but Demchak didn’t seem to mind valuations.
“Despite the fact that banking is going to be a tough environment for the next few years, due to the rates and costs of credit and all that we know, technology spending, I think there will be a real separation between winners and losers in this slow growing environment, ”he said at the Bank of America conference.“ We have the potential to be a winner in this space. We believe we have the tools to do it and in doing so be a much bigger institution. ”
Lots of opportunities
I think you can assume from all of Demchak’s comments that PNC still intends to make a big acquisition. The bank will be patient, but once the market is more stable, expect PNC to take a step. Most banks must want to be sold, so they probably want to wait for valuations to rise a bit before they sell, especially when you see a light at the end of the tunnel. Demchak believes that even after normalization, market conditions will not be easy for the banking industry due to low rates, the need to invest in technology, and potential loan losses. So while the PNC may not get the same deal as National City, it could very well buy a bank for much less than it would have before the pandemic started.
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