Demchak: PNC 'has never been stronger'
Bill Demchak will take over as CEO of one of America's biggest banks in April, but that was never his goal.
After 10 years as a top executive at PNC Financial Services Group Inc., a career on Wall Street in which he helped pioneer exotic financial instruments called credit derivatives and an early life growing up in Fox Chapel, he has done it anyway.
Demchak is described by his former boss at JP Morgan as a crisis manager who helped steer the Wall Street bank through the Asian financial crisis of 1998 and by a veteran banking analyst as helping PNC recover from sanctions by banking regulators in 2002.
“I like working in large organizations and affecting the behavior of large groups of people, which I seem to do OK at,” said Demchak, 50, on Thursday, when asked what motivates him as a banker and personally.
At PNC, he will impact 5 million banking customers in 35 cities when he takes over from veteran CEO Jim Rohr on April 23.
Demchak's challenge is to improve PNC's financial performance in a slow growth, low-interest-rate economy. His obstacles are more government regulation and a public perception of banking that's at a historic low.
Most recently, PNC's profits have leveled off after expenses of about $1 billion to pay for problem mortgages inherited from its largest acquisition — National City Bank in 2009.
“I'll call them legacy costs related to mortgages, but that's kind of about the past,” Demchak said. “When you look at what the future is about — growth in clients, revenue and income — the organization has never been stronger.
“Admittedly, we have things to clean up. ... We've taken reserves about the risks we know about; we'd like to think it's over.”
Demchak will be up to it, said Peter D. Hancock, CEO of Amercan International Group Inc.'s global property and casualty insurance unit, who was his boss at JP Morgan in the 1990s. Demchak was in charge of JP Morgan's loan portfolio, then about one-quarter of the bank's total balance sheet of about $260 billion.
The Asian financial crisis started in Thailand in 1997, spread to other parts of Asia, then to Russia, which defaulted on its debt, and culminated with a $3.4 billion bailout of U.S. hedge fund manager Long Term Capital Management LP in 1998.
“He came in at a time of crisis and turned around the portfolio,” Hancock said of Demchak.
“He has a tremendous strategic mind and had a vision of how this could be turned around, and how we could avoid doing this again,” Hancock said. “He's very practical, understands complex theories, how to implement them in a practical way and lead people. He also has tremendous courage — not afraid to confront in a constructive way when faced by obstructions.”
And Demchak led the creation of credit derivatives, which in early development were intended as a tool to manage credit risk in JP Morgan's loan portfolio. They grew into a big business and were linked to the mortgage market and the housing and credit crises, Hancock said.
“It's like building a highway to get from one city to another. There's very little you can do when a drunken driver drives too fast and has some crashes,” Hancock said of the use of credit derivatives in the mortgage market.
According to banking analyst Dick Bove, vice president of equity research at Rafferty Capital Markets in Rowayton, Conn., Demchak made his mark at JP Morgan and later helped straighten out financial issues at PNC.
“It's pretty clear he will be a strong chief executive,” Bove said. “PNC could not have found a better candidate.”
Demchak joined PNC in 2002 as vice chairman and chief financial officer after bank regulators increased supervision of PNC, saying the company used improper accounting and misled investors with off-balance-sheet entities created with AIG.
Now as then, Demchak said, “the challenge is to restore confidence in banking and PNC, particularly in our new markets.” PNC is in 35 markets across the country, he said.
PNC must continue to build what he called “brand equity,” which is being a good corporate citizen, Demchak said. Internally, PNC executives talk about a “go-to-market strategy.”
“We get a lot of business because we're in town. As silly as that sounds, that makes a big difference,” he said.
Two strategies PNC is pursuing under Rohr and Demchak are expansion of the bank's business of servicing wealthy clients and its 2011 expansion into the Southwest with the acquisition of the American retail banking operation of Royal Bank of Canada.
“We've have one of the top 20 wealth management platforms, but we hadn't done a good job of growing it. ... We didn't have the referral base” in branches, Demchak said. “Now one-third of our new business comes from our internal referral process.”
PNC has hired 600 wealth managers in recent years, and sales have never been higher, he said.
In the Southeast, “we're invading the turf of Bank of America, SunTrust, Wachovia and BB&T. We're underdogs in terms of market share going in,” Demchak said.
He believes PNC can take advantage of disruption in the Southeast banking market from the mortgage and credit crisis. The region was among the hardest-hit by bank failures. In such an environment, people shop for a new bank.
Analyst Bove said PNC's entry into the Southeast is a big jump from its traditional markets in the Midwest and Northeast. The competition will be different, too.
“The biggest banks in the Southeast are extraordinarily sophisticated on retail side, on service and in-depth products,” he noted.
In wealth management, PNC has been behind its competitors, Bove said.
“Mass-market banking is a loser. Where you've got to focus efforts is on people who have money,” he said. “Every bank and non-bank wants to do business with these people. It was never a business where there was little competition.”
Even so, Bove praised PNC overall.
He said three banks have merged as top performers among regional banks in the United States: US Bancorp in Minneapolis, BB&T Corp. in Winston-Salem, N.C., and PNC.
“Rohr and Demchak, or Demchak and Rohr, have developed it where investors think it's one of the best banks in the U.S.,” Bove said, in controlling costs, making acquisitions and developing products. “I'm not sure what people want them to do that they haven't done.”
Asked if his career goal was to become a CEO, Demchak said no. Nor did he have a goal of returning to the Pittsburgh area. He graduated from Fox Chapel Area High School in 1980 and earned a bachelor's degree from Allegheny College in Meadville.
Demchak said when he left JP Morgan, he took time off to think about what he wanted to do next. “Pittsburgh was not on the list.
“When the opportunity came up, my mother and brother were still in Pittsburgh. My wife was born in Pittsburgh but grew up in Florida.” So a return made sense because they had two children and later a third. “It just kind of worked.”
He was once quoted that his days at JP Morgan were the best time in his life. Is becoming CEO of a major bank better?
“Getting up every day, and seeing my kids is the best day. ... When you age, you lose some of the wonder you had, which is a good thing. I work in a respected place and live in a great city.”
He lives in the city of Pittsburgh. He still sees some of his high school friends. For them and him, “time has not moved.” And conversation often turns to football games from high school.
Demchak spent many years in New York. Now he has a “nice, big house, and I can walk down the street to Starbucks.”
John D. Oravecz is a staff writer for Trib Total Media. He can be reached at 412-320-7882 or email@example.com.