PNC Financial Services Group (PNC) , a Pittsburgh-based leading regional bank serving markets from Massachusetts to Indiana to Florida, has an important asset its peers don't -- a big stake in the world's leading money manager, BlackRock (BLK) .
In 1995, PNC purchased BlackRock to help build its asset management business. BlackRock retained its own branding and expertise in fixed income while growing assets and reaching a size where it could be file an initial public offering four years later and start its amazing growth as a public company. PNC retained a significant position in the company, now standing above 21% of outstanding shares.
As it grew over the past two decades, BlackRock purchased asset management operations while also growing organically. It expanded its fixed income business into equities and, eventually, alternative investments. Bank of America (BAC) (through Merrill Lynch's previous sale of its asset management operations) and Barclays (BCS) (through its sale of iShares) also became sizable shareholders of the company. Unfortunately for both players, they were desperate for cash and had to liquidate their positions. Bank of America exited its position in 2011 and Barclays did so in 2009.
PNC, on the other hand, chose to retain most of its position, believing in BlackRock's CEO, Larry Fink, and seeing the company's growing asset base. It would certainly have been tempting to sell during the financial crisis to build the bank's capital base, but PNC management maintained a steady hand throughout the tough times and was never forced to dump shares. It sold 7.5 million shares for $1.22 billion in 2010, but retained the majority of its stake, approximately 30.2% of its market cap.
This long-term investment approach paid off. BlackRock, with its considerable knowledge of fixed income markets, was able to avoid major mistakes leading up to the financial crisis, putting it in position to take advantage of weaker competitors. In June 2009, the company purchased Barclay's Global Investors, including its industry-leading iShares ETF platform, for around $13.5 billion. That acquisition turned out to be timely, as U.S. equity prices bottomed early that year and ETFs became a highly popular investment vehicle.
PNC has been able to piggyback on BlackRock's rise to become the world's asset management leader, now with $4.5 billion under supervision. What's important to note is this growth has led the investment to become a larger and larger percentage of PNC's assets. Currently, its BlackRock stake represents nearly a third of the company's market value. That percentage has increased steadily over the past 17 years and could continue to rise.
It's unclear what PNC's end game is. If the company has one, it's not saying. It's evident, though, that management's patience and long-term attitude has benefited the company.
Have shareholders recognized this value and given the company credit for its foresight -- or luck? It doesn't appear so. Selling at 12-times 2016 estimated earnings, PNC is priced like other well-run super-regional banks. BlackRock, meanwhile, sells at 19 times estimated earnings.
The bottom line is PNC has optionality. It can continue to hold BlackRock shares and hope they continue to increase in value. If it does, this investment will continue to boost revenues, profits, and market value. It can liquidate some of its investment and try to persuade the Federal Reserve to allow it to pursue a sizable share buyback and/or dividend increase. Or, it can pursue an acquisition and use this liquidity to help fund a purchase.
This is a position any bank would likely find enviable. It's surprising that analysts and investors rarely talk about it. The BlackRock asset often appears to be over-looked. Yet, it will likely benefit long-term PNC investors if and when management decides to monetize it. That day may be coming. We just don't know when.