Bill Demchak, CEO of PNC Financial Services (NYSE: PNC), is nothing if not ambitious.
He has a goal for the eighth largest U.S. bank to grow its assets to $1 trillion from $559 billion as of June 30, The Wall Street Journal reports. That’s a whopping 79% increase. Pittsburgh-based PNC has a solid track record of organic growth and expansion through acquisitions.
But that’s no guarantee of future success. The commitment to risky assets by banking giants Citigroup (NYSE: C), Bank of America (NYSE: BAC) and Wells Fargo (NYSE: WFC) as they expanded in the 2000s led to the financial crisis of 2007-09. That put them in need of government bailouts. PNC has given no indication of focusing on dangerous assets, however expansion always comes with risk.
Demchak certainly doesn’t lack for chutzpah in taking on the growth task. His nickname in the banking industry is “Jamie Jr.” That derives from his close relationship with legendary JPMorgan Chase CEO Jamie Dimon and their similar blunt styles. But Demchak joked to The Journal that the appellation should be reversed, with Dimon getting the moniker “Bill Jr.”.
Comparing Demchak to Dimon may be a stretch, but PNC’s success over the past 20 years is well documented. (Demchak joined PNC in 2002 as CFO.) “The bank has historically demonstrated superior underwriting abilities in comparison to its peers,” Morningstar analyst Suryansh Sharma wrote in a report.
That allowed the bank to withstand the 2007-09 financial crisis better than its competitors, he said. PNC’s loan loss provisions totaled 24% of its net interest income from 2007-12, far below the peer group average of 37%.
Shopping spree
The bank has successfully integrated acquisitions over the years. That includes the 2008 purchase of Cleveland’s National City Bank, which doubled PNC’s size, and its 2021 buyout of Spanish bank BBVA’s U.S. subsidiary.
“While mergers of this nature can change a bank’s culture, PNC’s underwriting culture has remained strong, demonstrated by lower net charge-offs than peers over the last five years,” Sharma said.
Earlier this month, PNC agreed to buy FirstBank of Colorado for $4.1 billion. The deal would give PNC the largest share of retail customers’ deposits in Denver.
Sharma expects PNC’s efficiency ratio to improve as a result of all the transactions — to 58 from a historical reading above 60. The ratio measures non-interest expenses divided by total revenue, so the lower the number the better. He anticipates returns on tangible common equity will average close to 17%, far above PNC’s 9% cost of equity.
Stock performance
The bank’s long-term strength is reflected by the outperformance of its stock versus the KBW Nasdaq Bank Index over the past 10 years. PNC stock has increased 124% compared to 112% for the index. To be sure, the index has outperformed short-term, rising 19% year to date, compared to 5% for PNC.
In any case, PNC continues to churn out solid earnings. Revenue gained 4.6% in the second quarter from a year earlier, to $5.66 billion. Earnings per share climbed 13.6% to $3.85.
“The bank has done a commendable job in generating fee revenue while controlling its expenses,” Sharma said. “While loan growth has been tepid in recent quarters, we have seen some early signs of commercial loan demand recovering.”
Banks can always make serious mistakes, as many of the biggest institutions did in the 2000s. But PNC appears to be on the right path.
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