Breakingviews: PNC picks Covid moment to cash in BlackRock chips

Bill Demchak has finally answered one question: When will PNC Financial Services, the Pittsburgh-based bank he runs, sell its 22% stake in BlackRock. On late Monday afternoon the top-10 U.S. lender with $412 billion in assets said it was offloading the entire amount, worth about $17 billion. It ends a 25-year financial relationship and will bring a windfall to Demchak’s firm.

PNC’s association with BlackRock began in the mid-1990s when it took control of what was then a fledgling money manager for around $250 million. BlackRock’s public listing and acquisitions of Merrill Lynch Investment Management and then Barclays Global Investors reduced the bank’s holding. But boss Larry Fink has in the interim turned the company into the world’s largest investment firm with some $7 trillion in assets.

Why sell now, though, is the new big question. Possible new rules are part of the answer. There’s a chance the Federal Reserve could decide that BlackRock should be treated more like a bank subsidiary of PNC under the Bank Holding Company Act, with more demanding regulation to match. Dissolving the ownership stake removes a potential headache for both companies, even if BlackRock could still face different calls for greater scrutiny for reasons of scale alone.

BlackRock has also weathered this year’s ructions well. Its stock has fallen less than 2% in 2020, compared to PNC’s 36% drop, leaving the bank’s stake equating to 40% of its market value.

Cashing in those chips will probably bag PNC just under $6 billion in fresh capital after tax, according to Jefferies analysts – the lender had already marked the investment on its balance sheet at around half its current value. That’s a significant buffer for any pandemic loan losses to add to the $9 billion or so the bank needed to pass the Fed’s most recent stress test.

Alternatively, it gives Demchak the wherewithal to go hunting for acquisitions, subject to regulatory approval. The country’s largest banks look pretty healthy for now. But smaller lenders and some fintech outfits may soon be struggling with the impact of Covid-19.

There are downsides. Demchak is giving up a diversifying income stream that accounted for 15% of earnings last year, while Fink loses a big shareholder whose support he could count on. It’s a bet the trade-offs are worth it.

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