A Conversation With PNC’s William Demchak

Written by

When Pittsburgh-based The PNC Financial Services Group, a $557.3 billion bank, sold its 22% stake in asset manager BlackRock during the height of the financial crisis for $14.4 billion, executives didn’t know what to do with the cash. Chairman and CEO William “Bill” Demchak explained on stage at Bank Director’s Acquire or Be Acquired conference Monday why he sold BlackRock and turned around and bought BBVA USA within six months. He also offers advice to bankers doing deals. This conversation with Editor-at-Large Jack Milligan has been edited for length and clarity.

BD: What was the decision-making process to sell PNC’s stake in BlackRock in May 2020 for $14.4 billion and use the proceeds to acquire BBVA USA for $11.6 billion in November 2020?
WD: Before the government put out all the fiscal support, you’ll remember that we didn’t know if the mortality rate [of coronavirus in 2020] would be 10% or 1%. All I could think was: Make sure the bank has the most capital, a fortress balance sheet and is the one to survive the day. That led to the decision to sell BlackRock.

So I figured how my options might play out. It wasn’t a certainty that we would find a target [to buy]. If I sold BlackRock, the bank would be absolutely fine, the shareholders would be mad at me because we’d have too much capital and no BlackRock anymore and I’d get fired. That was OK: The bank, our employees and our clients would be great. If it turned out that we had a recovery and managed to land an acquisition target, that was a home run. In the end, that’s what it was. But that six months in-between was really tough.

BD: How did you prepare the board for that decision?
WD: I remember one director said, “You don’t normally sell something until you have the thing you’re going to buy in the other hand,” which is absolutely correct. But we weren’t long from the financial crisis. The bank with the most capital wins every time. We had a big stack of capital in our BlackRock stake that wasn’t recognized. Cashing in those chips was the right decision.

BD: How was the acquisition received in Washington? Did you have any sense that regulatory attitudes toward large bank M&A were changing?
WD: Yes, although we probably didn’t realize how close we were. There’s been a sea change in Washington on large scale consolidation, as they looked at the risk of combining institutions, both theory and economic risk, but also community-based risk. And we made it through a window before that. Although I will say, we made it through the approval process without a single negative letter sent to the regulators.

BD: What did the BBVA USA acquisition do for PNC that you didn’t have before?
WD: Between BBVA and markets we opened up on our own, we went from being in probably 12 of the largest MSAs just a handful years ago to now being in the top 30. It’s remarkable the growth prospects of the markets that we’ve entered. Houston has gone from not being on our radar to being almost our third largest market. What we’ve seen in Colorado is just as tremendous.

BD: Do you foresee PNC doing another acquisition?
WD: I think we have to.

BD: And you think you will be allowed to?
WD: I don’t know. There’s a horrible joke: You’re in the woods and a bear’s chasing you and you’re lacing up your shoes. You can’t outrun the bear, but you don’t have to. You just have to outrun [the person you’re with]. And there’s a lot of banks in this room I can outrun. But the bear is going to get you eventually, if they don’t change the way they look at competition and the different risks in the banking system to allow banks to grow larger.

BD: Acting Comptroller of the Currency Michael Hsu recently gave a speech raising the issue of banks that he referred to as “too big to manage.” He said the OCC is beginning to work on a structure, almost a decision-making tree, of what the regulators could do to deal with a bank that they think is too big to manage. What’s your thoughts on that? Can a bank be too big to manage?
WD: I suppose anything can be too big to manage if you don’t have the right management team to help pay attention to stuff. … We’re a large bank, but we’re in the basic business, probably in the same business as [most of the bankers attending Acquire or Be Acquired]: We serve retail customers with deposits, savings, loans, traditional products. We serve corporate customers with treasury management, and lending products. … But we’re just doing what we’ve done for 165 years.

BD: What have you learned about M&A over the years that you think would be useful for this group to hear?
WD: In the simplest form, understand the reason you’re doing it. Have a clear purpose as to why, other than just trying to get larger. Make all the tough choices that you don’t want to make on people, on technology. Make the choices that are going to hurt today that pay dividends tomorrow. Under-promise, over-perform. Deals are tough. Integration of systems, particularly if both institutions have legacy tech, is really hard. You’ve got to go into it with your eyes wide open, so that whatever comes out of the other side is worth the pain you’re going to cause your employees and sometimes your shareholders.

Questions to ask about mobile banking and marketing

Written by


google-wallet.jpgRecently, Google generated a fair amount of buzz with its Google Wallet app.  Have you seen it?  It allows a consumer to load debit or credit card information into their Android-powered mobile device and pay on the go with a simple tap at “at hundreds of thousands of MasterCard PayPass merchant locations.”  Clever, right?   It should be, considering it was “designed for an open commerce ecosystem.” So is this a competitor to your bank —or a simple reinforcement that for those of you not in the mobile field, it really is time to sit up and take notice?  How might your board start down this path?  Glad you asked…

When I got my start with Bank Director in 1999, I innocently asked when a decision made it to the board’s level.  The answer came in the form of a drawing: a three-legged stool to be exact. Twelve years ago, our CEO depicted each leg with a word: Strategic, expensive, and risky.

Well, that picture remains firmly planted in my mind.  For a while, the marriage of all three applied nicely to issues like mergers and acquisitions, directors and officers liability and executive compensation. Since coming back in September, I’ve started to hear the same standards applied in terms of mobile banking strategy. Let me explain.

In April, at our annual Chairman/CEO peer exchange conference, a handful of CEOs from public banks with more than $1 billion in assets talked with me about growing their business in a recovering economy.  With a beer in hand, I consider those conversations off-the-record.  Let me just say, given our growing love affairs with mobile devices of all shapes, sizes and underlying technologies, the fact we were talking about their desire to provide a mobile banking experience to help transform the way people manage their finances through their institutions was not surprising.  In fact, one CEO offered that, with PNC “just across the street,” a strategy that challenged the status quo would be of interest to him, his chairman and his board.

With these CEOs thoughts rattling around in my mind, I thought to reach out to a few folks in the business to get their take. While most shared the standard stuff (you can attract new market segments! Increase customer satisfaction and loyalty!! Generate new revenue!!!), let me pass along a few tidbits c/o Intuit Financial Services‘ John Flora. John is the Mobile Solutions Group Product Manager—and counts banks with tens of billions in assets as customers. While we talked about a few roll-out opportunities, I think he has it right in terms of the questions that a CEO needs to ask in terms of mobile banking (no particular order):

  • How can we best grow our business using mobile as a complementary (not restrictive) asset to what we offer now?
  • How quickly can we make this happen?
  • What does the initial integration cost look like?
  • How does mobile fit into our core banking strategy?

We laughed because 12 to 18 months ago, thoughts about going mobile centered on cost reductions, retention of customers, building impressions, and more regular engagement. He said while those are still on the table, the last six months have seen most institutions realize that they cannot afford NOT to have a mobile strategy.

John also made the very good point that mobile banking requires the bank to back it up with marketing awareness. (This is where some banks fall down). In his experience, adoption rates are very high in the first month; but to sustain that momentum, leadership needs its employees to promote mobile apps and opportunities to better connect with clients on-the-go. So while putting a consistent marketing strategy into play on day one isn’t the job of the board, setting the strategy and expectations certainly is consistent with what I’m hearing today.

For all of us, job one

Written by


Maybe it’s all the traveling I am doing these days, but customer loyalty is top of mind. From American Airlines’ advantage program to Hyatt’s guest rewards, sometimes the littlest of things add up to something big (e.g. 1,099,622 miles flown on AA as of this morning). So yes, customer loyalty and me have a special bond, one worth exploring in the context of today’s financial community.

customer-service.jpgCase-in-point, I had the chance to watch PNC’s president (and head of Retail Banking) Joe Guyaux share his hows and whys of focusing on customer loyalty for one of the nation’s largest diversified financial services organizations. A keynoter at American Banker’s recent Best Practices in Retail Financial Services Symposium, he talked about PNC focusing on customer loyalty as a means to build a differentiated brand and grow customers while increasing (but not always maximizing) revenues. As a loyal PNC customer, I made a point of introducing myself to Joe after his talk concluded. You see, from slides on PNC’s definition of customer loyalty (“an enduring emotional connection and bond beyond our customers, employees and the PNC brand”) to the bank’s approach to creating brand ambassadors through social media, I was impressed to hear “the message from the top.” Indeed, what he shared with bank execs in Miami translated to the branches I regularly visit in Washington, D.C.  

Truth be told, one slide really stood out: PNC’s framework for winning loyal customers. Sure, we all know that loyal customers are integral to any business model. Still, interesting to note the elements that PNC defines to build and maintain that loyalty. Naturally, it starts with (and requires) engaged and empowered employees — and extends to:

  • A drive to deliver exceptional customer service;
  • The challenge to protect and grow its payments business;
  • A focus on earning a “share of a customer’s wallet;”
  • The discipline to maintain positive operating leverage;
  • Managing risks; and
  • Encouraging real and ongoing community involvement among staff.

While a number of banks espouse similar approaches to customer loyalty, PNC’s rise to its current position in the marketplace reminds us all that customer service really is job one. Seeing a message like Joe’s distributed and embraced across a national franchise? Impressive, to say the least.

Will 2011 be the year for bank stocks?

Written by


The bad news seems endless. Unemployment remains high. Bad real estate loans continue to hurt banks. Increased government regulation and caps on fees will hurt bank income in the future. And yet, so many bank analysts are so bullish on bank stocks in 2011.

Why?

Profitability is returning or will return this year to many mid-sized or small banks, several analysts say.

Stronger banks will be able to buy weaker rivals and grow market share. Even the investors of struggling banks stand to gain after years of misery. Their banks will get bought out at premiums compared to the disappointing prices of the last two years. 

Here is a review of what bank analysts are saying about the outlook for bank stocks in 2011 and their favorite picks:

mmosby.jpgMarty Mosby, a bank analyst at Guggenheim Partners in Memphis, says he thinks all of the 15 large-cap banks he covers will be profitable by the middle of this year and he projects a 30 percent stock market gain on average for his group, which includes Winston-Salem, North Carolina-based BB&T Corp., Atlanta-based SunTrust Banks, and San Francisco-based Wells Fargo & Co. 

“We believe 2011 will be the year of the recovery,’’ he says. “We will finally see banks return to the norm.”

Some banks will be better off than others in the new normal, of course.  Banks such as Wells Fargo & Co., Pittsburgh-based PNC Financial Services Group and New York-based BNY Mellon have revenue potential and strong capital, he says, which means they could buy other banks or increase dividends, always a plus for the many dividend-starved investors out there. PNC Financial Services Group reported today record profits of $3.4 billion for 2010.

Jim Sinegal, associate director of equity research at Chicago-basedMorningstar, Inc. expects his top picks such as New York-based JPMorgan Chase & Co. and Wells Fargo to return 25 to 30 percent gains for investors. He hedges that a bit by saying it may happen in the next year—or two.

“We don’t see any surprises ahead that could derail something,’’ he says. “We’ll see a slow and steady improvement. Credit is slowly and steadily improving. A lot of banks already are benefiting from that. The worst loans on their balance sheets have already been charged off.” 

He even likes Charlotte, North Carolina-based Bank of America, even though other analysts are just too worried about an ongoing investigation into the bank’s foreclosure processes to recommend the stock. 

“We think the best values can be found in recovering banks,’’ he explains. “We think the stock is cheap.”

Bank of America was trading at $14.37 per share Thursday midday on the New York Stock Exchange.

jharralson.jpgJefferson Harralson, managing director in Atlanta for Keefe, Bruyette & Woods, says smaller banks might have a more difficult time seeing stock market gains this year than big banks. They could be hit hard by new regulations that limit fee income. New restrictions on debit card fees charged to merchants could limit that source of income by as much as 75 to 80 percent, he says. 

Plus, many small and even regional banks have not paid back the government for the Troubled Asset Relief Program money, which could weigh on stock prices this year as well. Investors worried the bank will be forced to raise more capital to pay back TARP won’t be eager to buy those banks.

kitzsimmons.jpgKevin Fitzsimmons, managing director at Sandler O’Neill & Partners in New York, says 36 percent of the group’s bank stocks have a buy rating, compared to 26 percent in January of last year. 

He also thinks there will be more risk in small bank stocks this year, because the heavy weight of regulation will move to smaller banks, as in rolling downhill, as regulators begin forcing those banks to recognize their problem loans.

“This is not going to be smooth going (for all banks),’’ he says. “(The market) will be selective.”

The good news is all that new regulatory pressure on small banks could lead more banks to sell out—for a premium this time.

Sinegal said recent acquisitions have netted prices at two times tangible book value for the acquiring bank, as opposed to no premium or 1.5 times book value during the last year.

“There is more optimism that the worst is behind us,’’ Fitzsimmons says. “There has been optimism that some banks will be able to go out and acquire more banks and the acquired banks can be bought at some sort of premium.”