'Can't stay this low forever': Why PNC is hedging on loan losses

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With CEOs of the nation's megabanks at odds over the direction of the economy, Bill Demchak of PNC Financial Services Group stepped forward with a regional bank view of things on Wednesday.

Put him in the upbeat column. Mostly.

“We don’t think we’re heading toward a recession,” Demchak said on a conference call discussing the $382.2 billion-asset company's fourth-quarter earnings. “We see the economy growing by more than 2.5%. ... We feel pretty good about 2019, and we put it in our guidance.”

  • Lending? Loans at the Pittsburgh company are expected to grow between 3% and 4%, which would outpace the 2.6% increase last year to $226.2 billion, Demchak said.
  • Revenue? It will expand at about the same pace as loans, he said.
  • Credit quality? Well, generally good, but the answer was slightly more nuanced.

The first-quarter provision could range anywhere from $125 million to $175 million, with the wide range due to the fact Demchak and his team figure the good times will have to end sometime.

“Frankly, we don’t see any [problems],” Demchak said. “We had four commercial loans go nonperforming in the fourth quarter, but all for idiosyncratic reasons” unrelated to any credit trends. “We don’t see any issues, but things can’t stay this low forever.”

Overall, nonperforming assets totaled $1.8 billion or 0.47% of total assets on Dec. 31, down from 0.53% a year earlier.

PNC reported profits totaling $1.4 billion for the three months ending Dec. 31 and $5.3 billion for all of 2018. Embedded in those bottom-line results were record full-year net interest income of $9.7 billion and strong gains in almost every noninterest-income-related business line.

Probably the only black mark came in its asset management line, which saw revenues drop 12% on a linked-quarter basis to $428 million. Much of the difficulty was attributable to problems at BlackRock. Earnings at the giant money manager — of which PNC owns a 22% stake — were off due to market instability. It also recorded a $60 million fourth-quarter restructuring charge, of which $10 million flowed through to PNC’s results.

Reflecting the travails at Black Rock, total noninterest income fell 2% linked-quarter and 3% year-over-year.

“Absent the impact of BlackRock, we had a great year on fees,” Demchak said.

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R. Scott Siefers, who covers PNC for Sandler O’Neill, called the noninterest decline understandable but termed it a “negative” nonetheless.

“PNC’s fourth quarter trends strike us as mixed,” Siefers wrote Wednesday in a research note. “On the plus side, loan growth was strong, and expenses came in better than we had modeled. However, fees were lighter than we had hoped…not shocking, but still a negative.”

Meanwhile, PNC reported progress on two initiatives it began in recent months.

The company has added about 18,000 new accounts since rolling out a high-yield, online-only savings account in October. Executives said they were heartened by the fact about one-fourth of those new customers opted to make PNC their primary bank, adding they planned to study the situation more closely to see if there was an opportunity to drive additional new business.

Meanwhile, PNC's middle-market commercial expansion in Denver, Houston and Nashville, Tenn., is exceeding expectations, according to Reilly. Growth in the three new markets is outstripping PNC’s legacy markets, he added.

Buoyed by that success, PNC expects to continue its middle market expansion with moves into Boston and Phoenix later this year.

PNC expects to limit noninterest-expense growth to the low single digits in 2019, continuing a trend of cost control. Expenses totaled $2.6 billion for the three months ending Dec. 31, down 1% form the third quarter and 14% year over year. The fourth quarter of 2017 included a $200 million donation to the PNC foundation as well as a number of other one-time charges.

The solid progress on cost control was reflected in a full-year efficiency ratio of 60%, down from 64% a year earlier.

“We’re looking to see you get below 60%, so continued improvement is helpful,” John McDonald, who covers PNC for Bernstein, said on the call.

Siefers predicted “shares would be a little weak” following the earnings release, and investors seemed to agree. PNC shares had risen slightly more than 1% in late-day trading Wednesday.

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