Recruiter’s View

The Prince of Darkness is now Banker of the Year.  He’ll use M&A to put PNC on the SIFI list, because deposits are flowing uphill.  And scale matters.  (Stay with me.  This will all make sense.)

Bill Demchak has a history of getting things done.  He might have been a little aggressive when he hit on the idea of bundling credit default swaps and selling them to investors.

These, largely unregulated, SPV (special purpose vehicles) didn’t have to be fully funded.
They were described as insurance against loan defaults.

They were bets.

As the volume of sales increased, the loan quality decreased.
Right around the $62 trillion mark, the whole thing blew up.

Welcome to the Financial Crisis of 2007-2008.
And somewhere in there, Bill Demchak became known as the Prince of Darkness.

Demchak Today

Today, William S. Demchak is the Chairman, President and Chief Executive Officer for PNC Bank.

American Banker named PNC Financial Services Group’s Bill Demchak its 2023 Banker of the Year.

2023 Bank Crisis

It was a brutal year for the financial world.

I’ve been describing bank consolidation for some time.
Last year, in Small Banks Lose To Big Banks  
I said that Fed policies nearly guaranteed that money would move to the infamous SIFI “too big to fail” banks.

Weekly deposit totals changed drastically…

March 15, 2023 – Deposits at small banks fell by a record $119 billion.
Deposits at large U.S. banks rose $67 billion that week.

March 27, 2023 (Bloomberg) – Federal Reserve showed that large banks gained $120 billion in deposits while their smaller counterparts lost $109 billion.

Demchak Makes Headlines

Bill Demchak totally understands the situation.

His “move into that next level” statement flashed all over the internet.

He made very clear strategy statements during his recent Earnings Call.
I’ll pull quotes from his presentation to fill in the picture.

You can read the full transcript here…

The PNC Financial Services Group Q4 2023 Earnings Call Transcript
Provided by AlphaStreet
January 16, 2024

Demchak’s Opening Comments

PNC reported “a challenging and volatile operating environment for the banking industry.”
All the same, “PNC performed well during 2023 and delivered a solid finish in the fourth quarter.”
Fourth quarter income was $883 million.

Demchak identified four major contributors to PNC’S successful quarter…

First, PNC closed on the acquisition of the capital commitment loans from Signature Bank.
That immediately generated earnings.

(Do you remember Signature Bank?  It failed in March, 2023 with a flurry of Busted Banks. PNC picked up a piece of that.)

Second – Fee income increased.

Third – $325 million of layoffs (for 2024.)

Fourth – Strong credit quality.

To restate all that, PNC intends to grow.
And it is funding its growth with cost cutting and fee income.
“…we are targeting stable expenses for 2024 even as we continue to invest in key growth initiatives.”

Forecasting Recession In 2024

Robert Q. Reilly
Chief Financial Officer…

“…we’re expecting a mild recession starting in mid-2024, with a contraction in real GDP of less than 1%.
We expect the federal funds rate to remain unchanged between 5.25% and 5.5% through mid-2024, when we expect the Fed to begin to cut rates.”

SIFI Refresher

On March 16, 2023 I published How To Control All US Banks.

It included a definition of SIFI banks…

A systemically important financial institution (SIFI) is a bank, insurance company, or other financial institution whose failure might trigger a financial crisis. They are colloquially referred to as “too big to fail”. – Wikipedia

Obama made these six “too big to fail” banks immune to almost everything…

• JPMorgan Chase
• Bank of America
• Citigroup
• Wells Fargo
• Goldman Sachs
• Morgan Stanley

Apparently, Bill Demchak figured out that life would be much easier if he could get PNC on that SIFI list.

He’s taking steps to do that.

Demchak’s Strategies

If you’re looking at the transcript, about half way into it, an interesting conversation develops with Mike Mayo, Analyst at Wells Fargo Securities.

Mike Mayo referenced Bill Demchak’s December 5th statement:

…your ardent words, I quote, “Scale matters today more than it ever has” prior to March and the mini crisis. “We knew the technology mattered. We knew scale and brand mattered. They just eliminated tailoring and regulation for all intents and purposes.” etc., etc. You just go on to say that this will never be reversed. Scale is more important than ever. I could give the whole speech, but it seemed like a passionate speech more than I’ve ever heard you say before. So why now?

Demchak’s answer referenced the huge shift in bank deposits (that we discussed, above.)

Here are some excerpts…

“…corporates bluntly don’t necessarily trust the regulatory environment to ensure that their deposits at the bank are safe. And so we’ve seen those deposits flow uphill. And if you aren’t a primary relationship with that corporate, deeply embedded with treasury management and other services, you net-net lose corporate deposits.”

“…scale matters. I think we on net benefited from the mini crisis, but just barely. I think below us, people struggle with that conversation with corporate clients. Above us, perhaps, it’s easy, but I think we need to move into that next level such that we are seen coast to coast as a ubiquitous standard brand with the quasi support that the giant banks have in terms of times of crisis, I think it’s critical.”

“I think there’s going to be banks that are looking for strong partners, and I think we are a strong partner.”

“…we are a natural player in the consolidation of an industry where scale matters.”

“…If you think about what’s happening in the banking industry today… on the deposit share side, there’s a couple of clear winners. …There’s some people neutral and there’s people losing. There’s 5,000 banks in the country that I can take from and grow, right? …we might see if there’s inorganic opportunities when people come to the realization that they’re riding something down in a deteriorating franchise.”

“…scale matters. We’re going to have to play that game.”

“…I think we have proven as an acquirer that we know what we’re doing, and that the resultant institution is in fact stronger than the one we might acquire.”

Recruiter’s View

We have solid confirmation that the banking industry is being re-configured.
And it’s getting dangerous.

The 2023 Banker of the Year describes full-on combat, trying to avoid extinction.

He literally told the joke about running away from a bear:
You don’t have to be faster than the bear.
You just have to be faster than the guy you’re with.

-TD