Dive Brief:
- PNC announced plans Monday to sell its $17 billion stake in asset manager BlackRock, putting the bank in position to pursue acquisitions.
- PNC bought BlackRock for $240 million in 1995, when the latter was a $23 billion-asset mortgage securities unit within The Blackstone Group. Since then, PNC's stake in the company has winnowed to 22%, but BlackRock has grown exponentially, overseeing about $6.5 trillion as of March, according to Bloomberg. Blackstone chief Steve Schwarzman has since said selling BlackRock was "a heroic mistake."
- PNC CEO William Demchak said he would quit BlackRock's board of directors when the sale is complete. BlackRock said it would buy back $1.1 billion of the shares.
Dive Insight:
BlackRock's robust growth over the past decade has given PNC a steady source of profits and fees even when its competitors were not faring as well. The Pittsburgh-based bank's stock has more than doubled since 2008 — despite the BlackRock sell-off — and has outperformed the KBW Bank Index that tracks 24 of the nation’s largest lenders, Bloomberg reported.
From a conservative fiscal standpoint, the sale will at least boost the bank's capital levels and its capacity for credit losses. It would also reduce some of the bank's regulatory costs. That could offset a rocky first quarter in which PNC reported a 29% drop in net income and boosted its loan-loss set-aside to $914 million.
But Demchak may be thinking bigger, saying it's the right time to "unlock the value of our investment." The BlackRock sell-off positions PNC "to take advantage of potential investment opportunities that history has shown can arise in disrupted markets," Demchak said in a statement Monday.
He clarified that later in an interview with the Financial Times, emphasizing the importance of playing offense during an economic downturn.
“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," Demchak said.
PNC’s language “could not have been more blunt [regarding its] desire to buy distressed assets," Wells Fargo analyst Mike Mayo said, according to Bloomberg. "But that category — distressed assets — could contain a wide range of banks, nonbanks, fintech, problem loans, et cetera, et cetera.”
Kyle Sanders, an analyst at Edward Jones, pointed to PNC's past as a predictor of future behavior. He cited the bank's takeover of National City in 2008 as evidence that it may be looking to scoop up "likely another regional bank" amid a new financial crisis.
The U.S. arms of European banks such as HSBC or Santander could be attractive targets, a banker familiar with PNC’s strategy told the Financial Times.
"PNC will now have a treasure chest of capital that will provide downside support in the current environment as well as (one that) adds to strategic flexibility," Jefferies analysts wrote in a note to clients, according to the Financial Times.
The bank has shown a willingness both to make aggressive moves and to play the long game. PNC has been in a "consolidation business" for some time, Dawn Fabian, the bank's retail transformation manager, said in November at the Future Branches conference, noting PNC plans to combine 80 to 100 branches per year over the next five years.
In March, Demchak made clear that he was taking the long view on the economic rebound. "We changed from thinking that a V-shaped recovery was going to happen fast into more of a U-shaped recovery," he said on the bank's latest earnings call.
“I think there’s going to be opportunities, but it always surprises us in terms of what shows up," Demchak told the Financial Times. "We need to watch and hang around the hoop to see how this plays out.”
