The head of America's sixth-largest financial institution has made it clear that he no longer wants the company to be considered a regional bank.
PNC Financial Services Group CEO Bill Demchak said on a conference call with analysts last week that the company is scaling up in the wake of last spring's crisis that roiled regional banks across the country. He argued why it is “important'' to do so.
He said corporate depositors no longer trust U.S. regulators to keep all banks safe, and those customers are likely to migrate to the domestic giants with tacit support from the government. So Demchak wants his Pittsburgh-based bank to “move to the next level” and become “known nationally as the standard brand you see everywhere.”
“Size matters,” he added. “We're going to have to play that game.”
Demchak's comments have sparked fresh debate about the future path of the country's largest regional bank after the turmoil of 2023. Caught between giants like JPMorgan Chase (JPM) and thousands of smaller community banks, can local banks continue to grow, or do they need to? How can we consolidate and grow even bigger to ensure long-term survival?
Many of these banks are generally in a more stable position than in the first half of last year, when the failures of Silicon Valley Bank, Signature Bank, and First Republic sparked panic over the strength of many other mid-sized financial institutions across the country. It is in. .
The company's stock price continued to soar in late 2023 as investors became more confident that the Federal Reserve was prepared to start cutting ultra-high interest rates as early as March. Such measures would help mid-sized banks, which have seen their profits plummet as deposit prices soar.
However, it is not yet clear when or if these rate cuts will occur, and bank stocks slumped in early 2024 as policymakers dampened market expectations for a first-quarter rate cut.
This uncertainty means local banks will continue to struggle with a key measure of profitability known as net interest income. Net interest income measures the difference between the income a bank earns on loans and the amount paid on deposits.
Many local banks saw revenue decline in the fourth quarter, and some expect a similar decline in 2024. This includes PNC, which expects its net interest income to fall 5% this year.
'oh'
But Demchak's larger concerns are existential. He said last week that his bank needs to grow to stay in a category that can provide PNC with “the quasi-backing that a big bank has” in times of crisis.
This is not the first time Demchak has made this point. He made similar remarks in December when speaking at the Goldman Sachs Financial Services Conference in New York. Asked at the time if he would consider acquiring another bank, he said: “Today, more than ever, scale matters.”
Wells Fargo banking analyst Mike Mayo decided to ask Demchak about the topic again last week during PNC's fourth-quarter earnings call, and Mayo responded to the CEO's survival-of-the-fittest guidelines by saying, “Wow. '' he summed it up in one word.
Demchak's comments served as a “very clear advertisement” that PNC is considering acquiring other banks over time, Mayo told Yahoo Finance.
“We see this ad to buy Target as more of an announcement for the next three years, not the next three quarters,” he added.
Not all of Mr. Demchak's regional rivals agree with him. “I don't think scale is the answer for a bank like Key,” KeyCorp (KEY) CEO Chris Gorman told analysts last week. Key is a regional bank based in Cleveland.
“It's not a must-have,” added M&T Bank (MTB) CFO Darryl Bible. M&T is a regional lender based in Buffalo.
PNC has used acquisitions in the past to gain scale during times of stress across the industry. During the 2008 financial crisis, it was encouraged by the U.S. government to buy Cleveland's rival National City for $5.2 billion, effectively doubling its size.
Since then, Mr. Demchak has made many more acquisitions over the past decade, gaining a foothold in nearly every major metropolitan area in the country. His last deal was an $11.6 billion deal for Spanish banking giant BBVA's U.S. operations that was completed in 2021.
Last year, the CEO set out to expand further. PNC was asked by the FDIC to submit a bid to acquire the operations of San Francisco lender First Republic. That would have given PNC a bigger foothold on the West Coast.
However, the company lost out to JPMorgan, the country's largest and most profitable lender, in an early morning auction on May 1st.
From Wall Street to Main Street
Mr. Demchak, 61, is a latecomer to the community banking world. He began his career on Wall Street in the 1990s, working for his JP Morgan. During that time, he became head of structured finance and is best known for helping develop and sell credit default swaps to investors.
At age 40, Mr. Demchak joined PNC, a bank based in the area where he grew up. He served as CFO and head of Corporate Banking and Institutional Banking until 2009, when he became CEO.
Since then, he has led much larger banks, such as Bank of America (BAC) before it chose Brian Moynihan as CEO and Wells Fargo (WFC) before it appointed current boss Charlie Scharf. Are regularly mentioned or considered as potential candidates for management. However, he chose to remain in Pittsburgh.
Not everyone in the industry agrees with Mr. Demchak's latest assertion that local banks will be held back unless they merge.
“It's a great story,” said Gerald Cassidy, a bank analyst at RBC. “But it's not reality. The reality is that banks have a relationship.”
Ebrahim Poonawalla, an analyst at Bank of America, told Yahoo Finance that market share, or “density” of a particular business, exceeds national size.
“The whole picture looks like it's going to change in 2023,” said Scott Schiefers, an analyst at Piper Sandler. “Most people are concluding that banks simply need to get too big to compete. That means we need to expand.”
But there are many obstacles to consolidation, he said, from high interest rates to the Biden administration's skepticism about large mergers.
“Long-term, I don't think there's much objection to PNC being proactive about consolidating the industry,” he added. “But in the short term, I think many investors have time to figure it out.”
David Hollerith is a senior reporter at Yahoo Finance, covering banking, cryptocurrencies, and other financial areas.
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