This bank could be next with $1 trillion in assets. Should you buy the stock today?

According to the Federal Deposit Insurance Corporation, there are more than 4,500 bank branches in the US. However, there is a big discrepancy in size. Four banks — JPMorgan Chase, Bank of America, City Groupand Wells Fargo — each has at least $1.6 trillion in assets, while the fifth-largest bank has just $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 about $3.5 trillion in assets.

Scale matters in today’s banking world due to the complex regulatory landscape and the need to invest in technology. And make no mistake, the number of US banks will consolidate over the next few decades, and the big banks will get bigger and likely win. The bank I’m going to talk about could be the next to reach a trillion dollars in assets. Should you buy the stock today? Let’s take a look.

An aspiration to become greater

Behind the big four are three large super-regional consumer and commercial banks: US Bancorp (NYSE: USB), PNC Financial Services Group (NYSE: PNC)and Truist (NYSE: TFC). US Bancorp is the largest with nearly $665 billion in assets and has certainly been an acquirer in the past and could be in the future. Right now though, he doesn’t seem to have a huge appetite, not that he wouldn’t look at opportunities if they arose. Truist, meanwhile, is the smallest of the three, with about $512 billion in assets, and has been slow to make major acquisitions since the BB&T and SunTrust merger that formed Truist 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 CEO Bill Demchak, who is viewed very favorably by investors, made a big splash in early 2021 when the bank used proceeds from divesting its stake in the big asset manager. BlackRock to buy the US 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.

Earlier this year, Demchak said that size is a necessity during crises so that the PNC can get the same “almost 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 from being seen as a flight to safety.

“From a PNC perspective, it’s easy to conclude and I think you would agree that scale means growth. So, scale providers grow at a higher rate than non-scale providers. So we think it’s plainly obvious. The good news for PNC is that we are a qualified acquirer. I think we’re looked at a lot in terms of being good at it if and when the opportunity arises,” Reilly said at the time.

The story continues

PNC also has pretty good currency, with its shares currently trading at around 200% of tangible book value (TBV). This should put the bank in a pretty good position to find deals that not only increase revenue, but can also increase tangible book value. Nowadays, bank investors are very sensitive to dilutive transactions; they want to see an immediate increase in TBV or very short periods of earning.

PNC also has a Common Equity Tier 1 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 October 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 the sake of growing. Demchak recently told a conference that he doesn’t see anything of value right now, although bank mergers and acquisitions (M&A) are starting to pick up.

Also, bank investors aren’t very keen on big M&A right now. Many view the merger of equals between BB&T and SunTrust to create Truist as a disaster so far. Since the deal closed on December 6, 2019, the stock has fallen about 23% and Truist has failed to meet financial targets. In addition, the regulatory landscape is still quite difficult for large bank mergers. There are much bigger political issues these days, but the Biden administration has made mergers and acquisitions of big banks difficult. Regulatory approval periods have been greatly extended, and some large banks have canceled deals due to uncertainty about approval.

But finally I see Demchak, who is a well-known Frrotégé of Jamie Dimon as an ambitious CEO interested in legacy. He has the respect of investors, excess capital and good currency and has been very clear about the bank’s intention to grow. It would probably take at least two big deals for PNC to reach the $1 trillion mark in assets.

There could be short-term pressure when transactions are announced, especially if they result in dilution to tangible book value. There will also be execution risk. Fortunately, PNC has been a good acquirer in the past, so I have confidence in the bank’s ability to successfully integrate transactions.

Reaching $1 trillion in assets would mark PNC as a too-big-to-fail bank, along with the Big Four, giving it a special foothold in a largely commodity sector and the advantage of scale. That’s why, in the end, I 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 US Bancorp. The Motley Fool has a disclosure policy.

This bank could be next with $1 trillion in assets. Should you buy the stock today? was originally published by The Motley Fool