In June, PNC Financial Services Group (NYSE:PNC) closed on its acquisition of Banco Bilbao Vizcaya Argentari's U.S. banking operations. Then, during the third quarter, PNC completed the conversion, bringing all those operations onto its platform and rebranding all of the BBVA U.S. branches and offices. The conversion occurred less than a year after PNC announced the deal, which is very quick and on schedule. Although there is much work to do, PNC, which has more than $553 billion in assets, is well-positioned. Here's why.
Not only did the conversion take place in the 11 months following the deal, but PNC has ended up in a much better position than it anticipated at this point, with a higher tangible book value (what a bank would be worth if it were liquidated) and higher capital levels than it expected upon the closing of the deal.
Now the bank can get to work on the $900 million of anticipated cost savings it expects to remove from BBVA's expense base, which is the equivalent of 35% of its expense base. Management remains optimistic in achieving this level and the fast acquisition closing and conversion may enable the bank to find more cost savings. PNC's CEO, Bill Demchak, told analysts to think of the $900 million number as the number the bank knows it can get -- the bank actually knows where those savings are coming from. Demchak said the bank is likely to find some extra savings, but there may also be some areas it wants to invest in. So there will hopefully be more cost savings updates as we get into 2022.
The merger work is still not over, of course, as the bank intends to spend $980 million in one-time merger costs. PNC CFO Rob Reilly said the bank had incurred about half of that amount through the third quarter and intends to incur most of the remaining integration costs in the fourth quarter. Expenses are still high at the bank right now, with the integration costs and the high expense base at BBVA, but now PNC can get to work on the cost savings and has also been working to take out $300 million of PNC stand-alone expenses in 2021, which it expects to achieve. As the bank gets deeper into 2022, expect to see total expenses start to come down significantly.
Starting to see good loan growth
The other somewhat exciting news in the quarter was that PNC is starting to see some good signs of loan growth picking up on the commercial side, which not all banks are seeing yet. The PNC legacy portfolio saw its commercial loan balances increase by close to $4 billion, while consumer loan balances were up $1 billion. Total loan balances declined in the quarter due to the intentional run off of select loans in the BBVA portfolio and the forgiveness of loans from the Paycheck Protection Program.
But the bank saw good movement in its corporate banking and asset-based lending portfolios, with revolving credit line utilization stabilizing and even up slightly, according to Demchak. It also looks like, as PNC runs off certain loans in BBVA's portfolios, it may be able to start to grow loans among its new customer base. Demchak noted that following its acquisition of the U.S. banking operations of the Royal Bank of Canada in 2012, it saw nice loan growth acceleration in the two years following the acquisition due to the new customers and new markets.
Remember, revenue synergies and cross-selling potential are usually not modeled into an acquisition initially but are always hoped for after the acquisition is complete. With BBVA launching PNC into attractive business and growth markets like California, Texas, and other southern states, and with PNC's strong commercial and industrial business banking franchise, I am confident in PNC's ability to grow in these markets.
Looking for more cost savings and loan growth
The next few quarters should be interesting. While investors should expect continued noise in the fourth quarter and early 2022 due to continued integration costs, loan run off from BBVA's existing loan portfolio, and Paycheck Protection Program loan forgiveness, look to see if PNC can continue to grow core commercial loans and make headway into its new markets. Then for 2022, watch how expenses trend and hopefully management will find new savings in addition to the $900 million currently projected. Overall, with the BBVA conversion now complete, the new and enlarged PNC looks to be in good shape.