Why one giant regional bank no longer wants to be a regional bank

The boss of the sixth-largest lender in the US is making it clear that he no longer wants it to be viewed as a regional bank.

On a conference call with analysts last week, PNC Financial Services Group (PNC) CEO Bill Demchak made a case for why it’s “critical” his company gets bigger in the wake of a crisis last spring that roiled regional banks across the country.

Corporate depositors, he said, no longer trust US regulators can keep all banks safe, and these customers will likely migrate to national giants with implied government backing. So Demchak wants his Pittsburgh-based bank to “move into that next level” and be known “coast to coast as a ubiquitous standard brand.”

“Scale matters,” he added. “We’re going to have to play that game.”

PNC Financial Services Group Chairman, President, and CEO William Demchak appears before a House Committee on Financial Services Committee hearing on

PNC Financial Services Group CEO Bill Demchak. (AP Photo/Andrew Harnik) (ASSOCIATED PRESS)

Demchak’s comments are stoking a new debate about the path forward for the nation’s biggest regional banks following the turmoil of 2023. Can they still thrive in that pocket between a colossus like JPMorgan Chase (JPM) and thousands of tiny community banks, or do they need to consolidate and get much bigger to ensure their long-term survival?

Many of these banks are generally on more stable ground than they were during the first half of last year when the failures of Silicon Valley Bank, Signature Bank, and First Republic triggered panic about the strength of many other mid-sized financial institutions across the US.

Their stocks even surged late in 2023 as investors became more convinced the Federal Reserve was ready to start cutting sky-high interest rates as early as March. Such a move would help mid-sized banks that watched their profits plunge as deposits became more expensive.

But it is not yet clear when or if those cuts will happen, and bank stocks have fallen back at the start of 2024 as policy makers push back on market expectations for a loosening in the first quarter.

This uncertainty means regional banks will continue to struggle with a key profitability measure known as net interest income — which measures the difference between what banks earn on their loans and pay out on their deposits.

That income fell at many regional banks during the fourth quarter, and some said they expect it to fall during 2024 as well. That includes PNC, which said it expects net interest income to drop 5% this year.

Pittsburgh, Pennsylvania, USA - January 11, 2020: PNC bank corporation headquarters in Pittsburgh, USA, an American bank holding company and financial services corporation.

PNC’s headquarters in downtown Pittsburgh. (JHVEPhoto via Getty Images)


But Demchak’s bigger concern is existential: He said last week that his bank needs to get bigger so it can exist in a category that would give PNC the “quasi support that the giant banks have” during times of crisis.

This was not the first time Demchak has made this point. He also did so in December while speaking at the Goldman Sachs Financial Services Conference in New York. When asked then if he would consider acquiring another bank, he said “scale matters today more than it ever has.”

Wells Fargo banking analyst Mike Mayo decided to ask Demchak about this topic again last week during PNC’s fourth-quarter earnings conference call, and Mayo summed up his reaction to the CEO’s survival-of-the-fittest guidance with one word: “wow.”

Demchak’s comments served as “a very clear advertisement” that PNC is looking to buy other banks over time, Mayo told Yahoo Finance.

“I see this advertisement to buy targets as more of an announcement for the next three years, not the next three quarters,” he added.

Not all of Demchak’s regional rivals agree with his view. “I do not 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.

FILE - This Tuesday, Jan. 25, 2011, file photo, shows a sign at a KeyBank branch in Indianapolis. Regional banking company KeyCorp said Thursday Jan. 23, 2013 it's fourth quarter earnings climbed 1.5 percent, as revenue growth and a discontinued business gain countered costs from an efficiency initiative. (AP Photo/Michael Conroy, File)

Key, based in Cleveland, is one of PNC’s biggest regional rivals. (AP Photo/Michael Conroy, File) (ASSOCIATED PRESS)

“It’s not something you have to have,” added M&T Bank (MTB) CFO Daryl Bible. M&T is a Buffalo-based regional lender.

PNC has in the past used acquisitions to get bigger during times of industrywide stress. During the 2008 financial crisis it was encouraged by the US government to buy Cleveland rival National City for $5.2 billion, which basically doubled its size.

Demchak has since used more acquisitions over the last decade to establish a foothold in nearly every top metro area in the country. His last was a $11.6 billion deal for the US operations of Spanish banking giant BBVA that closed in 2021. PNC now has roughly $561 billion in assets.

The CEO tried last year to get even bigger. PNC was asked by the FDIC to submit a bid to acquire the operations of San Francisco lender First Republic, which would have given it a much larger foothold on the West Coast.

But it lost that auction in the early hours of May 1 to JPMorgan, the nation’s biggest and most profitable lender.

JPMorgan Chase & Co. Chairman and CEO Jamie Dimon, center, accompanied by PNC Financial Services Group Chairman, President, and CEO William Demchak, left, greets members of congress as he appears before a House Committee on Financial Services Committee hearing on

PNC CEO Bill Demchak, left, competed against JPMorgan Chase CEO Jamie Dimon, center, to buy the banking operations of First Republic from regulators last May. (AP Photo/Andrew Harnik) (ASSOCIATED PRESS)

From Wall Street to Main Street

Demchak, 61 years old, was a late arrival to the world of regional banking. He got his start on Wall Street, working for JPMorgan in the 1990s. While there, he became head of structured finance and well known for helping develop credit default swaps and selling them to investors.

Demchak arrived at PNC, a bank based in the area where he grew up, when he was 40. He served as CFO and head of corporate and institutional banking before becoming CEO in 2013.

He has periodically been mentioned or considered as a potential candidate to run much bigger banks, before Bank of America (BAC) chose Brian Moynihan as its CEO and Wells Fargo (WFC) appointed its current boss Charlie Scharf. But he has chosen to stay in Pittsburgh.

Not all industry observers agree with Demchak’s latest argument that regional banks will drag unless they merge.

“It’s a great soundbite,” said Gerard Cassidy, bank analyst for RBC, but “that’s not reality. The reality is that banks have relationships.”

Market share — or “density” in specific businesses — trumps national scale, Bank of America analyst Ebrahim Poonawala told Yahoo Finance.

Scott Siefers, an analyst with Piper Sandler, agreed that “the whole game seemed to change in 2023,” and that “what most people have concluded is that banks are just simply going to have to get bigger to compete.”

But there are a lot of hurdles to that consolidation, he said, from high interest rates to the Biden administration’s skeptical view of big mergers.

“Longer term, I don’t think there’s much dispute that PNC will be active in the consolidation of the industry,” he added. “In the immediate term, however, I think a lot of investors have time to figure that out.”

David Hollerith is a senior reporter for Yahoo Finance covering banking, crypto, and other areas in finance.

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