PNC Faces Decision Over $9.5 Billion BlackRock Stake
PNC Financial Services Group Inc. (PNC), the second-largest U.S. regional bank, faces the same decision on its 21 percent stake in BlackRock Inc. (BLK) that confronts many individual investors: sell or hold?
BlackRock shares have gained 30 percent this year and are trading near an all-time high. The market value of PNC’s stake in the world’s largest asset manager is $9.46 billion, according to data compiled by Bloomberg, while the Pittsburgh-based lender carries the 18-year-old investment on its balance sheet at $5.6 billion.
Selling the stock could allow the bank, led since April by Chief Executive Officer Bill Demchak, 50, to return billions in capital to investors and potentially boost its share price. By retaining its position as BlackRock’s largest shareholder, PNC maintains a steady earnings stream at a time when tepid loan growth and low interest rates have squeezed lenders’ margins.
“How does any investor deal with that, especially one that’s a publicly traded company?” said Terry McEvoy, an Oppenheimer & Co. analyst. “Do you sell a business that is more profitable? And then what’s the offset?”
PNC will “at some point” recognize the value and “do something,” Chief Financial Officer Richard Johnson said at a May 21 investor conference. Eight months earlier, former CEO Jim Rohr, 64, said he didn’t think PNC should sell the stake as doing so would reduce the lender’s diversification.
“In this environment, BlackRock remains a good investment for PNC, with strong returns from both an economic and regulatory capital perspective,” Marcey Zwiebel, a PNC spokeswoman, said in an e-mailed statement. BlackRock’s Lauren Post declined to comment.
The $9.46 billion investment was equal to about a quarter of PNC’s $37.5 billion market capitalization as of yesterday’s closing price. It’s also about the size of the market cap of KeyCorp (KEY), Ohio’s second-largest lender.
Some analysts and investors argue that PNC should hold onto the shares, saying they provide a reliable source of revenue as banks struggle to boost top-line growth. Combined revenue at the four other biggest regional lenders -- U.S. Bancorp, Capital One Financial Corp., BB&T Corp. and SunTrust Banks Inc. -- increased 4 percent in the first quarter from a year earlier, the slowest rate in 15 months. PNC’s revenue rose 6 percent during the period.
“It does give them a unique growth avenue that a lot of the other regional banks don’t have,” said Shannon Stemm, an analyst with Edward Jones & Co. in St. Louis.
PNC earned $395 million, or 13 percent of its profit, from its BlackRock stake last year and 12 percent in 2011 and 2010, according to company filings. That includes dividends and recording part of the asset manager’s earnings as its own net income. PNC’s shares have gained 21 percent this year, the eighth-best performer in the 24-company KBW Bank Index.
“The short answer is keep it,” said Matt McCormick, who helps oversee about $9 billion including BlackRock shares at Bahl & Gaynor Inc. in Cincinnati. He doesn’t manage PNC shares. “Whoever suggested doing this BlackRock deal is and should be taking continued credit for it.”
If PNC sold the stake, the buyback potential would be “limited” and subject to Federal Reserve approval through its annual stress tests, Keith Murray, an analyst at Nomura Holdings Inc., said in a note. The after-tax gain would be about $2.6 billion as of June 6, according to the note. Assuming PNC got approval to repurchase stock, that sum would equate to 37 million shares, or “not a great trade-off versus losing 14 percent of earnings per share,” he wrote.
PNC acquired BlackRock in 1995 for about $240 million to expand its asset-management business. Four years later, New York-based BlackRock filed an initial public offering and started trading at $14 a share. The company is now the world’s largest money manager with $3.94 trillion in assets, and its stock hit a record high of $291.69 last month.
Last year, London-based Barclays Plc (BARC) sold the 19.6 percent stake it acquired in 2009 when BlackRock purchased Barclays Global Investors. Bank of America Corp. (BAC), the second-largest U.S. lender, inherited a 34 percent stake with its 2009 takeover of Merrill Lynch & Co. The Charlotte, North Carolina-based bank sold its remaining shares back to BlackRock in 2011. PNC also previously reduced its stake, selling 7.5 million shares for $1.22 billion in 2010.
BlackRock, co-founded in 1988 by CEO Laurence D. Fink, 60, was largely a fixed-income manager until the mid-2000s. That’s when it acquired State Street Research & Management Co. and Merrill Lynch & Co.’s investment unit to add stocks and other assets. BlackRock’s 2009 purchase of Barclays’s investment division gave it iShares, the world’s biggest provider of exchange-traded funds.
BlackRock’s stock may fall in the short run if PNC sells, said Greggory Warren, a senior stock analyst at Morningstar Inc. in Chicago. The asset manager slid to a six-month low on May 22, 2012, the day after Barclays said it was selling its investment, before gaining 75 percent in the next 12 months.
PNC has created a deferred tax liability by marking up the investment. In the event of a sale, the bank would need to pay $1.9 billion in cash to the federal government, according to the company’s latest quarterly filing and a note from Nomura’s Murray.
The lender would have to consider the “most tax-efficient” plan possible before taking any action, Johnson, the bank’s CFO, said last month. “We clearly have to wait for time when both parties are ready to sit down and actually make that happen, and we’re not there today,” he said.
U.S. regulators are in the process of finalizing their interpretation of global capital rules. The Basel Committee on Banking Supervision, which sets the rules, has said “significant investments” in common shares of financial institutions can’t exceed 10 percent of a bank’s common equity.
The question is whether BlackRock would be considered a financial institution under the Basel rules, or if the committee is trying to discourage large stakes in other levered banks, said Richard Staite, an analyst in London with Atlantic Equities LLP.
PNC has calculated its Basel III ratios assuming the BlackRock stake would be treated as a financial institution, Nomura’s Murray said. As of March 31, PNC estimated its Basel III Tier 1 common capital ratio at 8 percent.
Other U.S. regional banks have been using proceeds from asset sales to return capital to shareholders. Cleveland-based KeyCorp agreed in February to sell its investment-management subsidiary and broker-dealer affiliate to a private-equity fund. The Fed notified KeyCorp that it had no objection to the bank using part of the proceeds to repurchase common shares, CEO Beth Mooney said during a June 11 investor conference.
Fifth Third Bancorp, Ohio’s largest lender, said last year it would use after-tax proceeds from the sale of its Vantiv Inc. stake to repurchase its own shares.
BlackRock also has said it plans to return capital to shareholders. Fink told investors last month that he intends to distribute “as much as we earn” in dividends and share buybacks. The company’s per-share payout was $1.375 in 2011, jumping to $1.50 in 2012 and $1.68 this year, according to data compiled by Bloomberg.
“Where else are they going to go to get that type of revenue stream?” asked Bahl & Gaynor’s McCormick. “I can’t see getting it off of car loans.”