PNC’s expansion yields dividends ahead of schedule, executives say

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PNC Financial Services Group’s expansion in retail and middle-market banking is ahead of schedule and starting to pay dividends, according to executives.

The Pittsburgh company launched a national digital bank and opened streamlined versions of branches in Dallas and Kansas City, Mo., in the past year. It plans to expand into Boston and Nashville, Tenn.

PNC, which has $408.9 billion of assets, says the investments contributed to the loan and deposit growth it reported Wednesday. Third-quarter loans rose 6% year over year to $237.7 billion. Deposits also increased by 6% over that time, to $279.1 billion.

Executives had been planning to break even in each new market for lending to middle-market companies within three years. “If anything, we're kind of running ahead of that,” CEO William Demchak said on a conference call with analysts.

Its new retail centers are also breaking even at a faster clip than traditional startup branches in new markets, Demchak said. They also are attracting deposits at a rate as high as five times what a new branch typically brings in.

Any income from new middle-market lending offices across the country could have the added benefit of preventing the company from making riskier loans in its traditional markets to fuel growth.

“We’ve been able to grow by pulling share in newer markets without having to push on credit risk or other levers,” Demchak said.

Before PNC enters a market, it identifies the top-50 business customers there and begins making pitches to pull them away from existing lenders.

“We'll be very patient to get the right 50, and we've been at this for a while, so it's starting to play out,” Demchak said.

Terry McEvoy, an analyst with Stephens, said PNC’s “branch-light” model that carries fewer expenses than a traditional branch appears to be working and that it is definitely “gaining traction” in commercial lending.

“I’m not surprised to hear the initial success of this strategy,” McEvoy said. “Hopefully those customers are the right customers in terms of the underlying risk profile. And going forward, as deposit rates go down, we’ll see if bringing on these higher-cost deposits will be the right move.”

Demchak said PNC does not have plans to reduce its offers to those opening accounts with its digital bank just yet.

“Obviously, the yield seekers will be less active in a lower-rate environment, and we take that into account as we think about this going forward,” Demchak said. “It's one of the reasons why we continue to think our branches matter.”

PNC’s earnings per share of $2.94 beat by 14 cents the mean estimates of analysts polled by FactSet Research Systems. It reported net income of $1.4 billion — virtually unchanged from the third quarter of last year — after about a 1% uptick in noninterest expenses to $2.6 billion.

Net interest income increased by 1.5% to $2.5 billion. Net interest margin narrowed by 7 basis points to 2.84%.

PNC anticipates a dip in net interest income for the fourth quarter as the Federal Reserve is expected to cut borrowing rates at least once before the end of the year.

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