Responding to a rash of downgrades of its stock, a top PNC Bank Corp. official said Thursday that the bank would accept a decline in earnings as it restructures its balance sheet, rather than compromise its credit standards.
Walter E. Gregg Jr., PNC's executive vice president of finance and administration, said the Pittsburgh banking company is now bringing its balance sheet management in line with its operating strategies. He added that he doesn't anticipate much earnings growth before 1996.
"The restructuring will involve deleveraging our balance sheet," he said. "We may even recommend to the board a stock buyback at some point. We are not going to compromise this franchise to chase growth."
While PNC has been on the defensive since a dismal third-quarter earnings report that revealed a rapidly shrinking net interest margin, Mr. Gregg's comments hinted that other banks may be in similar straits but making up the shortfall by compromising standards.
Indeed, analysts have said they are watching Banc One Corp. (see story on page 4) and Huntington Bancshares Inc., both of Columbus, Ohio; First Union Corp., Charlotte, N.C.; and Cleveland-based Keycorp because all are highly interest rate sensitive.
After posting earnings Sept. 30 that were down 14% from last year's third quarter -- and with no hope that the fourth quarter will be better -- PNC has been undertaking a massive reengineering of its balance sheet.
For the first nine months of the year, PNC's net interest margin was 3.57%, down 44 basis points from the 4.01% recorded the year earlier.
Also in the first nine months of the year, the company reported a net securities loss of $13.9 million, compared with a net gain of $184.2 million in the same period of 1993.
To stanch some of the bleeding, PNC has sold nearly $2.7 billion of fixed-rate securities and replaced them with variable-rate instruments.
But the fact that PNC sells fixed-rate swaps for variable-rate securities almost ensures that the fair market value of its portfolio will continue to decline, with the rate paid on interest rate swaps possibly exceeding the rate received.
Ronald I. Mandle of Sanford C. Bernstein & Co., who downgraded his 1995 earnings estimate for PNC stock from $3.25 per share to $2.75 on Wednesday, said, "Much of the current problem stems from the likelihood that the current $12.7 billion of interest amortizing swaps will extend in maturity as rates rise."
This makes other analysts question how soon a turnaround at the $64 billion-asset bank can be achieved.
Brown Brothers, Harriman & Co. analyst Nancy Bush, who also downgraded PNC's stock on Wednesday, explained: "The upshot of all this is that net interest income will be down by 7% in the fourth quarter of 1994 and by 15% in 1995."
Besides the margin squeeze, PNC is also suffering because of its loan portfolio mix.
Carole S. Berger, an analyst at Salomon Brothers Inc., who reduced her estimates for the company on Thursday, said PNC was greatly dependent on commercial loans, which total 37.4% of its portfolio. She noted that the faster-growing and more profitable consumer loans comprise 25.6% of PNC's loan book.
Mr. Gregg admitted the bank's lending volume was a problem. "We have not experienced the kind of loan growth that we experienced during the last economic expansion," he said.
If PNC was a more aggressive loan originator, it could eliminate many of its balance sheet problems, he added. "We are not as aggressive as we used to be in loaning money. We like it that way. It's an appropriate strategy. The historical levels of loan growth just are not there," he said.
He emphasized, however, that PNC's unwillingness to compromise its credit quality dates from 1990, when it first tightened its loan standards.
"The new operating environment demands that we manage our balance sheet differently," said Mr. Gregg. "I think banks across the board will have to deleverage. We are not going to proceed as we have proceeded historically."
As of the third quarter of 1994, PNC had a securities portfolio of $23 billion, or about 35% of earning assets. Investment securities totaled $18 billion, with an additional $5 billion available for sale.
The bank has $12.9 billion of collateralized mortgage obligations and $4.5 billion of mortgage-backed securities.