PNC’s heir apparent predicts anemic recovery [The Pittsburgh Tribune-Review]

Feb. 19--WILLIAM DEMCHAK -- who one banking expert says might be the next chief executive of the nation's fifth largest bank -- has several worries about the economy and the financial industry.

Among them are a disastrous commercial real-estate market, a jobless recovery and rising interest rates.

But as senior vice chairman of PNC Financial Services Group, Demchak expects to steer the Pittsburgh-based banking giant through dangerous shoals -- just as he did seven years ago when PNC was hit with an accounting scandal.

Demchak on Thursday described the ruptured economy and the financial industry in the keynote speech at the Association for Corporate Growth, Pittsburgh chapter's annual conference in the Sheraton Station Square, South Side. About 150 attended.

"What caused this financial crisis was a lack of regulation on the unregulated firms," such as hedge funds, said Demchak. "I'd move the regulatory umbrella to cover more firms."

Hired in 2002, Demchak, 47, is an expert on financial risk management, commercial lending and capital markets. He was hired from the banking giant, JPMorgan Chase, where he ran the global structured finance and credit portfolio.

"He was important to PNC avoiding the whole industry debacle of 2008," said Gary Townsend, president of Hill-Townsend Capital LLC, a banking analysis and hedge fund firm in Chevy Chase, Md., which owns many bank stocks, including PNC.

Townsend said Demchak is probably "the anointed one" to succeed long-time PNC CEO James Rohr, 61, whenever he decides to stand aside.

That would explain why Demchak turned down another job, Townsend said. Demchak was approached in December to run Bank of America Corp., the nation's biggest bank, after embattled CEO Kenneth Lewis announced he was retiring.

"It's nice to be loved," was Demchak's only reply yesterday, when asked about declining Bank of America's feelers.

In 2002, the Federal Reserve ordered PNC to restate earnings downward by $155 million because of questionable accounting. PNC had moved $762 million in bad corporate loans off its books through "special purpose vehicles" created with American International Group, or AIG.

A Securities and Exchange Commission investigation led to tighter regulatory control of PNC and an outside review of senior management. Senior executives departed.

Then in August 2002, PNC hired Demchak as chief financial officer. At the time, many banks were starting to gorge on subprime mortgages and securities, and many were trying -- and often failing -- to offset risk by trading in derivatives.

They are complex securities where parties bet on changes in interest rates or the possibility of loan defaults -- including the "special purpose vehicles" that got PNC in trouble.

Demchak helped create some of those complex instruments while at JPMorgan Chase. That experience "speaks to his creativity and intelligence," said Townsend, and positioned him to steer PNC around the reckless credit and investing decisions that plagued the financial industry much of the last decade.

"I recall meetings in Pittsburgh years ago where Demchak said it made no sense for institutions to be taking some of the risks they were taking," said Townsend.

Such as what National City Corp. did, especially its subprime lending and careless expansion into Florida. Those missteps crippled the Cleveland bank -- and enabled PNC to acquire it in late 2008 "for a song," said Townsend. The deal elevated PNC in size to the nation's fifth largest bank by deposits.

Demchak is a local native. He is a graduate of Fox Chapel High School and a graduate of Allegheny College in Meadville.

Demchak said 2010 will be a "year of recovery," but barely. Gross domestic product, or the sum of goods and services produced, should grow by 3 percent this year and next, he said, but that's tepid, as recoveries go. And job growth is nowhere near the 200,000-a-month in hiring necessary to show a net increase in employment.

He is concerned about mortgage interest rates. They are at historic lows largely because the Federal Reserve has been buying mortgage bonds. But its program will end in March, which will push up interest rates, he said.

Other interest rates are likely to move higher, too, he said. With about $1.5 trillion in federal debt to be financed, the public markets will crowd the estimated $2.8 trillion in U.S. corporate debt that needs to be refinanced. The effect will be rising rates late this year and 2011, he said.

"Banks want to lend. PNC is, and most banks are," said Demchak. "But loan demand comes from hiring and building inventories, which is not happening."

Thomas Olson is a Pittsburgh Tribune-Review staff writer and can be reached at 412-320-7854 or via e-mail.

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