Please ensure Javascript is enabled for purposes of website accessibility

Why PNC May Use a Different M&A Playbook Than It Did During the Great Recession

By Bram Berkowitz - Jul 19, 2020 at 1:07PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The bank pounced on a big acquisition in 2008 during the Great Recession, but now it may be more patient.

In 2008, amid the Great Recession, PNC Financial Services Group (PNC 0.98%) acquired National City Corp. in a deal that valued National City at $7 billion less than its tangible book value, according to The Wall Street Journal . The deal is considered to be a success by many, and PNC's CEO Bill Demchak even said on an earnings call last July, well before the novel coronavirus pandemic hit, that he would love to do another deal just like it if it was out there .

But while PNC has made it very clear it's looking to purchase another bank by selling its 22.4% ownership stake in global asset management firm BlackRock (BLK 0.36%), it likely will not pounce as quickly as it did during the Great Recession.

The facade of a PNC bank branch.

Image Source: Getty Images.

A patient approach

When asked about his thoughts on acquisitions during the company's second-quarter earnings call, Demchak said, "We're going to be patient here." PNC is taking this approach partly because the current recession is not developing as most recessions do. "We're in pretty early innings here to see how this all plays out, the fiscal payments that the government put out, plus what the Fed has done has effectively masked what are some pretty severe underlying problems in the economy ... if the government keeps providing stimulus, it will tell us how much of that capital we need in the first place and secondly, what the opportunities will be to deploy it ."

While most large banks are setting aside large sums of cash to cover future potential loan losses, actual loan losses through charge-offs (debt unlikely to be collected) and delinquencies are not rising significantly compared to the loan loss provisions banks are taking to prepare for the losses. That's because of the unprecedented amount of current government intervention, including the Paycheck Protection Program, $1,200 stimulus checks, and increased unemployment benefits. 

But this also makes it difficult to truly evaluate loan books and the overall credit quality of banks, which are major considerations when acquiring another bank. While smaller bank deals are still happening, PNC will likely look to acquire a larger, more complex bank with at least tens of billions in assets.

Why patience could be more expensive

While it may be riskier to make a big acquisition at the moment, PNC could likely get a better deal if it bought a bank right now because bank valuations are mostly lower. There is still a good deal of uncertainty with the credit quality of borrowers and economic conditions going forward.

Once the uncertainty clears, however, bank stock prices and valuations will likely rise. Additionally, with the sale of its BlackRock stake, PNC increased its tangible book value from $84.93 per share in the first quarter to $93.54 per share at the end of the second quarter . That gives PNC more purchasing power and creates a wider gap between PNC and potential acquisition targets trading at lower valuations.

But what's different from the Great Recession is that banks are not considered the main problem, and are also not considered to be at risk of failing (at least, not yet). When PNC bought National City, it received government assistance, according to The Wall Street Journal. The paper also reported that regulators told National City at the time that an acquisition was their only option after the bank ran into trouble with subprime mortgages .

Still potential for a good deal

Despite a somewhat different strategy, PNC still has the opportunity to make a big purchase at a good price. The average premium that acquiring banks have been paying over a bank's tangible common equity has already come down 15% from the average in 2019, according to data compiled by American Banker . This number could come down further as banks become more accustomed to seeing lower premiums over book values in deals, or if loan losses in a few months or quarters exceed banks' expectations. This would put some banks in a serious bind, opening the doors for banks with lots of cash on hand -- like PNC.

Bram Berkowitz has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

The PNC Financial Services Group, Inc. Stock Quote
The PNC Financial Services Group, Inc.
$175.63 (0.98%) $1.70
BlackRock, Inc. Stock Quote
BlackRock, Inc.
$758.58 (0.36%) $2.75

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/16/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.