Pad reserves or buy out a rival? BlackRock haul gives PNC options
Think the decision by PNC Financial Services Group to sell its stake in BlackRock signals that the bank has big M&A news around the corner? Well, it depends on how long it takes to get around the corner.
Bank analysts and even PNC’s own chairman and CEO say there could be an acquisition — and some think there might even be a dream partner under consideration — but that it’s too soon to strike a deal given the economic fallout from the coronavirus pandemic.
The Pittsburgh company “might have aspirations for a deal, but it’s so early in the cycle and there’s so much uncertainty that I think a transaction — if that’s what they do with the capital from the sale — will be a ways away,” said Scott Siefers, an analyst at Piper Sandler. “They need more clarity on the depth and breadth of this downturn" and to know "how hard it will hit" potential acquisition targets.
PNC this week announced plans to divest its 22.4% stake in the behemoth asset manager BlackRock after a 25-year relationship. The deal, which closed Friday, means the $445.5 billion-asset PNC cashed out about $14.7 billion in BlackRock shares. Of that total, analysts say the company is set to retain about $5 billion after taxes, which is a large chunk of change that could be especially helpful as the economy remains in a free fall and the probability of significant loan losses escalates.
PNC set aside $914 million in the first quarter to deal with loan losses. That was up 384% from a year earlier.
Against that backdrop, industry observers said, the sale is an offensive move that prepares PNC for whatever comes next in a pandemic that has unraveled businesses and upended job security across the country.
“This gives them a lot of optionality in a very uncertain time,” said Jennifer Demba, an analyst at SunTrust Robinson Humphrey. “Is this going on for another three months or three years? We don’t know.”
PNC Chairman and CEO William Demchak, who was not made available for this story, told the Financial Times this week that the bank will be looking for opportunities to buy, though it has no target in mind.
“I think there’s going to be opportunities, but it always surprises us in terms of what shows up,” Demchak said. “We need to watch and hang around the hoop to see how this plays out.”
That is a much different stance on growth than what Demchak expressed last year when he said PNC’s focus was on “intelligent organic growth” and that he didn’t "see value in acquisitions.”
Analysts point to a few potential targets: Citizens Financial Group in Providence, R.I.; Regions Financial in Birmingham, Ala.; and Comerica in Dallas. Stock prices for each company have underperformed in recent years, analysts said, which means PNC could use the BlackRock proceeds to pay cash to scoop one of them up.
All three companies declined to discuss their interest in M&A activity. A Comerica spokeswoman said the $76.3 billion-asset company is “pleased with" its "current footprint” and thinks its “strategy and key strengths will enhance long-term shareholder value.”
Dallas is one of the markets PNC is targeting as part of a nationwide middle-market and retail expansion. In July 2019, Demchak told investors that PNC’s “solutions centers” in Dallas and Kansas City, Mo., are growing at five times the pace of new branches in the company’s legacy markets.
Citizens and Regions both would present geographic overlap. That could be a chance for PNC to cut costs and, in the case of Regions, entrench itself in the Southeast, a market that continues to grow in population and economic vitality.
Of the three, Citizens and its $176.7 billion in assets would create the largest combined institution. It’s unknown how regulators would react to a deal of that size during the current crisis.
The decision to sell the BlackRock stake now, after all these years, is a highly strategic move, analysts agreed. And it’s straight out of the playbook of Demchak’s predecessor, James Rohr, who guided PNC’s 2008 purchase of the troubled National City in Cleveland. With a price tag of $5.6 billion, the crisis-era deal more than doubled PNC’s asset size and catapulted it into the ranks of the nation’s 10 largest banks.
Vining Sparks analyst Marty Mosby said the BlackRock sale couldn’t have come at a better time. After a decadelong period in which banks have generally outperformed BlackRock by stock value, the reverse is now true as investors shy away from bank stocks and BlackRock benefits from a relationship with the Federal Reserve in which the asset manager will direct bond-buying programs.
The result: a widening gap between the value of PNC stock and the value of BlackRock stock that means it finally makes sense for PNC to sell. On Friday afternoon, PNC’s stock price was roughtly flat on the day, while BlackRock’s had risen 2%. Year to date, PNC's shares have slid 39%, while BlackRock's have been break-even.
Mosby said he thinks that gap is the “trigger point” that led PNC management to decide to sell now.
“The value, it’s huge and that’s what makes this so strategic,” Mosby said.
PNC hasn’t completed a whole-bank acquisition since 2012 when it bought RBC Bank USA from Royal Bank of Canada for nearly $3.5 billion in cash and stock. The transaction included more than 400 branches in North Carolina, South Carolina, Georgia, Florida, Alabama and Virginia.
Now PNC looks ready to do another deal, even if it takes a little bit of time to get there.
“Regardless of what comes down the pipeline, PNC looks like the best positioned [bank] to be able to contend with it, whether that’s capital ratios or loss-absorption capacity,” Siefers said. “Either way, they look very, very strong right now in terms of having the wherewithal to deal with the future.”