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

In 2008, amid the Great Recession, PNC Financial Services Group (NYSE: PNC) 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 anearnings calllast 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 (NYSE: BLK), 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-quarterearnings 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.

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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.

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