The PNC’s decision to sell its $ 17 billion stake in BlackRock was prompted by the bank’s growing fears about the US economy, chief executive Bill Demchak told the Financial Times.
The head of the seventh American commercial bank said the sale would give him a “foolproof” balance sheet to face an extreme crisis or a war chest to buy troubled assets in a more moderate recession.
“As we entered this crisis, it became clear that everything we thought we knew was inaccurate,” said Mr. Demchak of the deliberations that led the PNC to decide to end its long relationship with the most the world’s largest asset manager.
“We are in this economy where everyone bases their models predicting the future on the past and of course we have never been in a situation where [we] were effectively forced to shut down the economy with as many fiscal stimulus measures. ”
American banks set aside tens of billions of dollars in the first quarter to deal with possible loan losses. At PNC, provisions for loan losses in the first quarter increased five-fold to $ 914 million.
“I cannot stress the importance of being able to attack in this environment,” said Demchak. “If you find yourself in a situation where you defend yourself, where you reduce your balance sheet, where you are worried about your capital, where you continually cajole shareholders or customers to stay with you, you’re not focused on growth. “
PNC announced Monday that it will sell its 22% stake in BlackRock after 25 years, a move that will increase PNC’s senior common equity ratio from 9.4% to 11.4%. It is well above the minimum ratio of 4.5% that the bank must hold.
PNC’s preferred option is to use the additional capital to buy another bank at an attractive valuation, which Mr. Demchak said was more likely in the future than in the recent past. Recent acquisitions have required high prices or equal mergers, as when BB&T combined with SunTrust last year to create a bank just larger than Mr. Demchak’s.
“Even if the credit losses are not that serious [during the Covid-19 crisis], the earning potential of banks in a zero-rate environment, with all the necessary costs that we had before embarking on this business, is going to be quite difficult, “he said. “The boards are going to have realistic discussions [about potential sales]. ”
A banker familiar with PNC’s strategy said that American branches of European banks such as HSBC and Santander could be attractive targets if their parents needed capital to support struggling domestic operations.
Demchak said he had no fixed goal in mind. “I think there will be opportunities, but it always surprises us in terms of what comes up. We have to watch and drag the hoop to see how it goes. “
The bank would not set an “artificial limit” on the size of a potential acquisition to avoid moving into a regulatory category that requires more capital, added Mr. Demchak.
Mike Mayo, analyst at Wells Fargo, said that the sale of BlackRock reflected PNC’s “bearish” outlook and was a “wise” decision by Mr. Demchak.
“Remember, it was the CEO who led the takeover of National City at 40% of the tangible pound during the great financial crisis – an incredible deal,” said Mayo.
Scott Siefers, an analyst at Piper Sandler, said PNC had “much better to wait behind the scenes for negative news to arrive and rush when valuations are low”. A necessary condition was that “someone must be willing to sell at 60 or 70 percent of the book value” – and there was no guarantee that anyone would be.
In the meantime, the sale of BlackRock’s stake will deprive PNC of about 15% of its annual revenues, according to Autonomous analysts.
“If we find ourselves in a situation where the economy is coming back strong, we will end up with diluted profits and excess capital,” said Demchak. “If things are bad or rather bad or really bad, we have an extraordinary opportunity to go there with our eyes wide open.”