In 2011, strong banks will take the next step in recovery, shifting from strengthening balance sheets to deploying capital for loan growth. Sure, you may wonder if it’s prudent for banks to leverage so soon after the financial crisis, but CEOs of major banks are indicating that’s exactly what they’re prepared to do in 2011. If you don’t listen, you’re likely to miss out on some great banks at prices far less than they’ll be in a year, including regional banking goliath PNC Financial Services (PNC).
Why should you buy PNC? The Government set the seeds for PNC’s success when it decided to embark on its loosely defined, easy money, bank-recapitalization plan. A plan, which alongside providing unprecedented liquidity and balance sheet support, helped PNC double its size into the teeth of the recession with the arranged take-under of National City (NCC) – a former Wall Street banking favorite with a long Ohio rust-belt history and a 2007 market value of $25 billion.
The 2008 $5.6 billion deal, done at 20% below then current NCC share prices, turned PNC into the 5th largest bank by deposits and significantly expanded its reach to the West of its Pennsylvania roots. Sure, it saddled PNC with National City’s bad debt, tied to NCC’s top 10 subprime lending ranking in 2006, but it also helped PNC secure $7.7 billion in TARP capital and gave PNC an unprecedented opportunity for geographic and deposit base growth.
Exactly how important has National City been to PNC? Legacy NCC markets accounted for 44% of corporate banking, wealth management, institutional investments and commercial banking sales last year, up from 42% the prior year. All of which helped drive a PNC record $3.4 billion in net income. And, PNC estimates it will be able to leverage the legacy NCC business to account for more than half PNC’s total revenue over the coming years. Why? Because few regions were harder hit in the recession than the Rust Belt. Its heavy manufacturing exposure drove unemployment to a peak of 11.8% in February 2010. But, just as it was hardest hit, its been one of the first to strengthen exiting the bear market, thanks in part to the Government’s rescue of the auto industry and more broadly to its cheap money policy. In November, Ohio’s unemployment rate had already fallen to 9.3%.
As jobs have returned to the legacy NCC market, PNC has executed its cross marketing programs effectively. PNC is investing heavily to boost its deposit base, a move that will provide it with stable and inexpensive funding in the post-low rate world. PNC developed workplace and education based marketing programs to attract new deposits, programs that accounted for 38% of new accounts last year. PNC’s transaction deposits rose $8.5 billion over 2009. The increase in demand deposits, and the roll off of CDs with much higher interest rates, helped full year deposit costs fall 50bps – boosting net interest margin.
Why do we care as investors? Because PNC is setting itself up for wider margins as it leverages lower costs and cheap demand deposits into new bank loans.
Since the acquisition, PNC has cut $1.8 billion in annualized costs out of the combined bank, $600 million more in cost savings than it had guided originally. At that rate of cost savings alone, the NCC deal paid for itself in about 3 years.