Markets
PNC

This CEO Just Said a Second Round of Stimulus 'Absolutely' Needs to Happen

Banking is one of the most closely linked industries to the overall U.S. economy because banks lend to nearly every industry, as well as to consumers. So, when PNC Financial Services Group (NYSE: PNC) CEO Bill Demchak says he thinks a second round of stimulus is "absolutely" needed to better help consumers and businesses make it through the coronavirus pandemic, it's certainly not something to take lightly.

Loan losses dependent on stimulus

When the coronavirus pandemic started to hammer the economy earlier this year, Congress eventually responded in late March with a $2.2 trillion stimulus bill that included $1,200 stimulus checks, an extra $600 in unemployment benefits per week, and the Paycheck Protection Program (PPP) to aid small businesses that were ambushed by the pandemic. The Coronavirus Aid, Relief, and Economic Security (CARES) Act, the largest stimulus in U.S. history, has worked well so far, with banks not seeing near the level of loan losses they would expect to see in a recession, let alone one of this magnitude where many states essentially closed their local economies for more than a month.

Generic stimulus image

Image source: Getty Images.

But as the effect of that initial stimulus fades, and the country is still potentially months away from a vaccine (let alone a time when everyone feels safe to fully venture out again). Congress is contemplating multiple proposals for a second stimulus bill to further bridge people and businesses through the pandemic. With the political climate in Washington, D.C., extremely partisan right now, it's unclear when (or even if) a second stimulus bill will actually be approved.

Although the struggles of certain commercial sectors of the economy such as travel and entertainment, lodging, and retail are well documented at this point, PNC's Demchak said he is becoming increasingly concerned about consumer borrowers as well. PNC is the seventh-largest bank in the U.S., with more than $460 billion in assets and more than 2,280 offices in 23 different states.

When talking about when significant loan losses will begin to materialize, Demchak said on the company's recent earnings call, "The consumer number in my view is going to be highly dependent on whether they provide more fiscal stimulus, which I think they absolutely need to do." Demchak's concerns stem from the fact that the additional $600 in unemployment benefits per week expired at the end of July, and he is seeing bank accounts that were relying on that aid start to decline.

But even as it relates to commercial loans, Demchak said that a second round of stimulus and a renewed PPP program could also change the outcome of commercial loan losses. He said the bank conducted a survey on its smaller business and commercial clients, and 60% of respondents said if the pandemic continues for another year, they will be out of business.

This all leads to a question that Bank of America analyst Erika Najarian has been asking bank CEOs: Will stimulus and actions by the Federal Reserve change the outcome of total loan losses from the pandemic, or merely kick the can down the road?

While I don't think anyone knows for certain, the consensus seems to be that they could change the result, but only if the programs can last until the pandemic ends. And if the pandemic takes too long to end or stabilize, it may not be feasible to keep doing stimulus.

A more direct call

Demchak's comments regarding a second round of stimulus being vital has certainly been the most direct I've heard from a large bank CEO on recent earnings calls. I think most have acknowledged that a second round would certainly help.

Already, big bank CEOs are saying that significant levels of loan losses won't begin to materialize until the back half of 2021. A second round of strong stimulus could stretch that horizon even more. It might even push losses off far enough to where the economy is back operating at a much stronger level, at which point more consumers and businesses might be on better financial footing to come through on their loan payments.

10 stocks we like better than PNC Financial Services
When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*

David and Tom just revealed what they believe are the ten best stocks for investors to buy right now... and PNC Financial Services wasn't one of them! That's right -- they think these 10 stocks are even better buys.

See the 10 stocks

*Stock Advisor returns as of September 24, 2020

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.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

In This Story

PNC

Latest Markets Videos

The Motley Fool

Founded in 1993 in Alexandria, VA., by brothers David and Tom Gardner, The Motley Fool is a multimedia financial-services company dedicated to building the world's greatest investment community. Reaching millions of people each month through its website, books, newspaper column, radio show, television appearances, and subscription newsletter services, The Motley Fool champions shareholder values and advocates tirelessly for the individual investor. The company's name was taken from Shakespeare, whose wise fools both instructed and amused, and could speak the truth to the king -- without getting their heads lopped off.

Learn More