Last Word: Q&A With William Demchak

*The following article appears in the second quarter 2024 edition of Bank Director magazine. It and other stories are available to magazine subscribers and members of Bank Director’s Bank Services Program. Learn more about subscribing here.

William “Bill” S. Demchak, the chairman and CEO of Pittsburgh-based PNC Financial Services Group, has been on the speaking circuit of late, talking about the changing competitive dynamics between large and small banks. Recently, he spoke with Editor-at-Large Jack Milligan about the importance of scale for an article on page 28. The interview has been edited for clarity and brevity.

Why does scale matter to PNC going forward?
I think if you’re not growing, you’re dying. But if you look at bank market share since the financial crisis, the very big banks, JPMorgan Chase & Co., Bank of America Corp. and even Wells Fargo & Co., have grown deposit share at a pace where they’re literally [creating] a PNC every five years. And if you move down through the chain, the only others that are growing deposits are those that have done acquisitions. Everybody else is shrinking. And it’s accelerated since [the failures of several banks in] March of 2023. A lot of banks putting up a good front have gone aggressively into brokered deposits and mixing deposits to gain additional insurance, which ultimately gives them higher funding costs.

Why are the very big banks growing? Their products relative to ours aren’t necessarily better. In some cases, they’re worse, but they’re ubiquitous. It’s brand recognition and the power of marketing, the old stuff. If somebody moved from New York to Pittsburgh 20 years ago, 10 years ago, they canceled their JPMorgan account and opened a PNC account. And now the attrition that you used to have from the natural movement of the population no longer exists. JPMorgan is building branches all over the place.

Becoming a global systemically important financial instituion used to be a scarlet letter. That benefits them now in terms of public perception. 

And then of course an important point is just the combination of tech spend but also cyber and fraud costs and the regulatory burden. Layer on that, whatever regulators come up with vis-a-vis Basel III, the cost burden gets larger. Scale helps you with that.

I take it that PNC will do an acquisition going forward if it makes sense?
Logic would suggest that as time progresses, smaller banks are going to struggle with the new cost burdens, both technology risk and deposit costs. We will do just fine, and we’re a natural consolidator if smaller banks look at their strategic plan and say, “I don’t know how to grow this place anymore.” But we’re not going to push. I just think that’s going to happen.

Did JPMorgan and Bank of America destabilize the regional bank market during the liquidity crisis because they were able to pull so much money away?
When CNBC and Bloomberg just kept flashing, “Regional banks down 5%,” for good or bad, we get thrown into a bucket called “regional bank” and we’re not differentiated from PacWest. I think that did as much damage as anything else.

Do you see a role for government in managing the consolidation of the industry?
Government should execute regulation while thinking about the impact on the long-term trendlines of the industry. Through the last financial crisis, government just wrecked the mortgage business inside of banking through regulation. And now, 78% of the mortgage business is outside the banking system. The regulators hate that because these nonbank mortgage players don’t have capital or liquidity to deal with foreclosures and modifications and so forth.

I think there’s going to be three types of banks longer term. One will be those that can compete coast to coast for U.S. clients. And I think personally, that’s probably a trillion-dollar balance sheet.

And some of the mid-tier banks, given the new cost burden, will underperform and go away. There are exceptions in the middle, specialists such as Capital One Financial Corp., with a very particular focus.

I think all the banks that couldn’t intelligently deploy the liquidity they generated when all the money was free go away. They got into receivables coming out of online lenders; they got into leasing. All the businesses that don’t own the customer, those banks go away. 

You go all the way down to the other side and you get to the privately held community banks. They lend locally because they know people. People stick with them because they trust them, and they operate in markets big banks don’t want to be in.