Get ready for wave of small-business defaults, PNC’s Demchak warns

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Banks are about to start feeling the economic pain caused by the global coronavirus pandemic, PNC Financial Services Group CEO William Demchak warned Wednesday.

So far the damage has been minimal because consumers’ checking account balances have been propped up by government stimulus checks and reprieves from making mortgage, car and other monthly payments while the economy was on lockdown.

But those balances are starting to shrink again, and Demchak fears that a slowdown in consumer spending will lead to “a lot” of defaults from both small businesses and their landlords when forbearances extended to them earlier in the pandemic run out in the third quarter.

“I’m really concerned about it,” Demchak said on a webcast hosted by the commercial real estate firm Walker & Dunlop. “I don’t know if this is going to devastate us, but it’s going to put us into a period of really slow growth.”

Demchak said he also worries about a resurgence of the virus in the fall causing further damage to household finances.

“That unfortunately hurts the parts of the economy” — lower-income households — “that are least able to deal with it,” Demchak said.

Already some states such as Texas, California, Florida and Arizona are seeing a surge in new cases after reopening their economies sooner than others. Pausing additional openings or re-shuttering some businesses is threatening to derail a recovery and raising the specter that some banks will need to boost provisions for loan losses than previously estimated.

The uneven recovery is going to make it “really tough” to bring the economy back to full employment, he said.

A jobs report from ADP and Moody’s Analytics Wednesday showed that 2.3 million jobs were added in June, which was lower than most experts were expecting. On the bright side, ADP and Moody’s said that 3 million jobs were added in May after previously reporting a decline of 2.7 million jobs during the month.

The Labor Department is scheduled to release its nonfarm payroll count on Thursday.

Demchak also on Wednesday addressed the racial tensions that have gripped the country in recent weeks following the deaths of several Black men and women at the hands of police.

He noted that conversations among PNC’s Black employees have been “much more intense and direct” than they’ve ever been before and that corporations must examine what investments they can make in communities of color.

"This is America’s problem at this point,” Demchak said. “We're underproducing as a nation because we're ... not investing in a massive subset of our population. We’ve got to change it."

PNC said in June that it would spend more than $1 billion to address systemic racism. The money will go toward financing community development projects, capital for small businesses and funding for nonprofits that promote social justice.