Bill's Bold Bet
Last month, PNC Financial Services Group sold its 22% stake in BlackRock for $14.4 billion.
It was a bold move. Maybe brilliant.
Fifteen percent of PNC’s earnings last year came from BlackRock, the world’s largest money manager. The investment was so substantial that PNC treated it as a separate business segment.
If you like playing Monday morning quarterback, the timing of the sale cost PNC $5 billion in profits, given that shares of BlackRock have since gained 35%.
But hindsight is 20/20.
“It was better to be a seller when we wanted to be a seller as opposed to be a seller when we were a forced seller,” explained Chairman and CEO William Demchak earlier this week. “We recognized that we needed to, in effect, exercise that option while it was exercisable.”
Demchak’s rationale is as sound today as it was a month ago.
“The stock market is effectively pricing in that everything works,” he continued. “Behind the scenes, what hasn't played out, and will take time to play out, is the deterioration we've seen in small business, in commercial and real estate, and ultimately in consumer that [will only be obvious once the stimulus payments stop].”
PNC is the country’s largest master servicer of commercial mortgage-backed securities, so Demchak has a unique vantage point on this.
From that perspective, things aren’t getting better; they’re getting worse.
PNC had $2 billion of loans in its CMBS servicing portfolio show up in special servicing in each of the past two months, reflecting some type of modification. In just the first week of June alone, it added $1.5 billion.
“All the deferrals we and the rest of the industry have done just by saying, ‘Don't pay us,’ I think the pain shows up,” Demchak said. “All of that's been hidden today. Right? None of that is showing up today because if you just deferred somebody, you don't have to create a TDR, and it doesn't show up anywhere.”
That’s why PNC sold its BlackRock stake; it senses opportunity and wants optionality.
“We expected and still expect there to be some fairly substantial disruption across the financial landscape,” Demchak said. “We wanted to be able to take advantage of that from an offensive standpoint as opposed to playing defense and hoarding capital and answering questions about the dividend and all of the above.”
The stock market makes it seem like the worst is behind us, but this is no time to be complacent.
A storm is gathering strength in the distance.
No one knows how bad it’ll be or when it'll hit, but PNC will be ready when it does.
John J. Maxfield
/ executive editor of Bank Director