PNC Financial girds for 'shallow' recession, builds reserves

PNC Financial Services Group boosted its loan-loss provision during the fourth quarter and cautioned that it is bracing for a mild recession in 2023.

The Pittsburgh bank said it expects gross domestic product will fall 1% this year, but employment will hold relatively strong. Chairman, President and CEO William Demchak conceded, though, that the outlook is cloudy, uncertainty looms large and credit quality could deteriorate.

"As we look ahead, we are operating our company with the expectation for a shallow recession in 2023," Demchak said Wednesday during the company's earnings call. "Accordingly, this outlook drove an increase in our loan-loss provision in the quarter."

PNC Bank - PNC Financial Services Group
Pittsburgh-based PNC is projecting average loan growth of 1% to 2% in the first quarter, along with a 1% to 2% decline in net interest income.
Stefani Reynolds/Bloomberg

The $557 billion-asset bank said its provision for credit losses in the fourth quarter totaled $408 million, up from $241 million in the third quarter. A year earlier, PNC posted a benefit of $327 million from its provision.

Net loan charge-offs were $224 million, up 88% from the third quarter.

The fourth-quarter provision increase partly reflected loan growth — average loans increased 3% to $322 billion during the quarter, reflecting both consumer and commercial growth — but also the potential for economic weakness ahead.

Robert Reilly, chief financial officer, said PNC finished 2022 on solid overall footing and expects continued growth this year. But he said the pace of expansion would ease on multiple fronts, given the economy's vulnerability to inflation that hovers above 7% and rising interest rates that more than doubled in 2022.

PNC is assuming that the Federal Reserve's benchmark interest rate will increase by 25 basis points in both February and March, Reilly said. "Following that," he said on the earnings call, "we expect the Fed to pause rate actions until December 2023, when we expect a 25-basis-point cut."

PNC is projecting average loan growth of 1% to 2% in the first quarter, Reilly said, with net interest income expected to decline by 1% to 2% after jumping substantially in 2022 as interest rates rose.

Higher rates tend to bolster loan margins initially, and to drive up deposit costs later. Fee income, which increased slightly during the fourth quarter, is expected to slide 3% to 5% in the current quarter.

PNC said that it expects charge-offs to moderate somewhat to about $200 million, and that the fourth-quarter total reflected a single, soured credit that accounted for much of the quarterly increase.

"With charge-offs having been so low, it's not surprising to see volatility quarter to quarter, and we saw this in the fourth quarter with an outsized loss on one commercial credit," Demchak said.

While deposits decreased slightly in the final quarter of 2022, PNC expects to maintain steady funding levels early this year in order to fund ongoing, albeit lighter, loan growth, Demchak said.

"We continue to manage our liquidity levels to support growth," he said. "Our deposits remain relatively stable, and we've increased our wholesale borrowings to bolster liquidity."

PNC reported fourth-quarter net income attributable to common shareholders of $1.4 billion, up from $1.2 billion a year earlier but down from $1.56 billion in the third quarter.

The company posted fourth-quarter earnings per share of $3.47, up from $2.86 a year earlier and down from $3.78 in the previous quarter.

Analysts surveyed by FactSet were expecting earnings of $3.95 a share.

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