There are more than 4,500 bank subsidiaries in the U.S., according to the Federal Deposit Insurance Corporation. However, there is a wide discrepancy in size. Four banks -- JPMorgan Chase, Bank of America, Citigroup, and Wells Fargo -- each have at least $1.6 trillion in assets, while the fifth largest bank has only $664 billion in assets. The next 10 banks after Citi total about $4.3 trillion in assets, compared to Chase's main bank subsidiary, which has roughly $3.5 trillion in assets.
Scale matters in the world of banking today due to the complex regulatory landscape and the need to invest in tech. And make no mistake, the number of banks in the U.S. will consolidate over the next few decades, and the big banks will get bigger and likely be the winners. The bank I am going to talk about could be the next to reach $1 trillion in assets. Should you buy the stock today? Let's take a look.
An aspiration to get bigger
Sitting behind the big four are three large consumer and commercial super-regional banks: U.S. Bancorp(NYSE: USB), PNC Financial Services Group(NYSE: PNC), and Truist(NYSE: TFC). U.S. Bancorp is the largest with nearly $665 billion in assets, and it's certainly been an acquirer in the past and could be in the future. However, right now, it doesn't seem to have a huge appetite, not that it wouldn't look at opportunities if they came along. Meanwhile, Truist is the smallest of the three, with about $512 billion in assets, and it has been slow to make major acquisitions since the merger of BB&T and SunTrust that formed Truist back in 2019.
I think PNC, which currently has $557 billion in total assets, will make a big push in the coming years to reach $1 trillion in assets. PNC's CEO Bill Demchak, who is viewed very favorably by investors, made a big splash in early 2021 when the bank used proceeds from the divestiture of its stake in the large asset manager BlackRock to purchase the U.S. operations of the Spanish bank BBVA for $11.6 billion. Over the past year, Demchak has been very transparent in his desire to grow, not just for growth's sake, but as a necessity.
At the start of this year, Demchak said that size is a necessity during crises so PNC can garner the same "quasi support that the giant banks have." At an industry conference in February, Demchak and CFO Rob Reilly pointed out that during the banking crisis last March, the biggest banks -- including PNC -- benefited as a result of being viewed as a flight to safety.
"From PNC's perspective, it's easy to conclude, and I think you would agree scale equals growth. So the scale providers are growing at a higher rate than the nonscale providers. So we think it's plainly evident.The good news for PNC is we are a skilled acquirer. I think we're viewed largely in terms of being good at it if and when the opportunity occurs," Reilly said at the time.
PNC also has a pretty good currency, with its stock currently trading at roughly 200% of its tangible book value (TBV). This should put the bank in a pretty good position to find deals that are not only accretive to earnings, but also potentially accretive to tangible book value. These days, bank investors are very sensitive to dilutive deals; they want to see immediate TBV accretion or very short earnback periods.
PNC also has a common equity tier 1 capital ratio of 10.2%, which looks at a bank's core capital compared to risk-weighted assets such as loans. The bank's regulatory requirement for next year (starting Oct. 1) is 7%, so the bank is also operating with a healthy amount of excess capital.
It will take time
Despite the desire to grow, I expect Demchak to remain disciplined and not grow just for growth's stake. Demchak recently said at a conference that he's not seeing anything of value right now, although bank mergers and acquisitions (M&A) is starting to pick up.
Bank investors are also not super keen on large M&A right now. Many view the merger of equals between BB&T and SunTrust to create Truist as a disaster thus far. Since the deal closed on Dec. 6, 2019, the stock is down roughly 23%, and Truist has failed to hit financial targets. Additionally, the regulatory landscape is still quite difficult for large bank mergers. There are far bigger political issues these days, but the Biden Administration has made large bank M&A difficult. Regulatory approval times have been greatly extended, and some large banks have called off deals due to uncertainty over approval.
But I ultimately view Demchak, who is a well-known protégé of Jamie Dimon, as an ambitious CEO interested in legacy. He has the respect of investors, excess capital, and a good stock currency, and has been very clear about the bank's intent to grow. It would likely take at least two large deals for PNC to hit the $1 trillion asset threshold.
There could be some near-term pressure when deals are announced, especially if they result in dilution to tangible book value. There will also be execution risk. Luckily, PNC has been a good acquirer in the past, so I do have confidence in the bank's ability to successfully integrate deals.
Reaching $1 trillion in assets would designate PNC as a too-big-to-fail bank along with the big four, which does give it a special moat in a largely commoditized sector and the advantage of scale. That's why I do ultimately view the stock as a good long-term buy.
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JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Bank of America is an advertising partner of The Ascent, a Motley Fool company. Citigroup is an advertising partner of The Ascent, a Motley Fool company. Wells Fargo is an advertising partner of The Ascent, a Motley Fool company. Bram Berkowitz has positions in Bank of America and Citigroup. The Motley Fool has positions in and recommends Bank of America, JPMorgan Chase, PNC Financial Services, Truist Financial, and U.S. Bancorp. The Motley Fool has a disclosure policy.
