Unrelenting interest income pressure weighs down PNC's earnings

Andrew Harrer/Bloomberg

Soft loan demand and elevated deposit costs amid prolonged high interest rates dragged on Pittsburgh-based PNC Financial Services' earnings to start 2024, while commercial real estate, or CRE, weakness pushed up charge-offs and raised the prospect of further credit quality deterioration this year.

The $566 billion-asset bank's executives, however, said Tuesday during a first-quarter earnings call with analysts that noninterest expense control efforts set in motion last year, including job cuts, are gaining traction and should help the company keep costs in check. The bank also said that it expects the Federal Reserve to begin cutting rates in the second half of this year, paving a path for lower deposit costs and increased loan demand that could bolster net interest income later this year.

PNC executives said they expect the company to do well in some areas and less well in others this year. The bank reiterated its prior forecast for company-record net interest income in 2025.

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Chief Financial Officer Robert Reilly said during the call that PNC expects average loan growth of 1% this year, despite a decline in the first quarter. With the Fed keeping its benchmark rate elevated but steady since last July, he also said deposit costs could peak in the first half of this year.

"Going forward, we remain well-positioned for the NII benefit of repricing low-yielding fixed rate securities and loans maturing during the latter half of 2024 and into 2025," he said.

While the country's economic growth has slowed modestly in recent months, Reilly said PNC expects gross domestic product growth of 2% this year. The bank anticipates the Fed will cut rates twice in the second half of the year, by 25 basis points each, with the first reduction likely in July and the second to follow in November.

First-quarter results, though, were weaker.

PNC reported first-quarter net income of $1.3 billion, down 21% from a year earlier. It posted earnings per share of $3.10 per share, down from $3.98 in the first quarter of 2023.

A $130 million pretax Federal Deposit Insurance Corp. special assessment impacted the bank's earnings. It marked the second quarter that the FDIC assessed the country's larger banks to replenish the deposit insurance fund following multiple costly regional bank failures in 2023.

But revenue headwinds were also to blame for the lighter bottom line.

The bank posted revenue of $5.1 billion, down 8% from a year earlier.

Its net interest income of $3.3 billion decreased 9% from a year earlier, as higher interest-earning asset yields were more than offset by increased funding costs. Its net interest margin contracted 27 basis points from a year earlier to 2.57%.

Average loans declined 1.5% from a year earlier to $320.6 billion, while average deposits slipped 4% to $420.2 billion.

Noninterest income of $1.9 billion fell 7%. PNC's noninterest expenses ticked up slightly — less than 1% from a year earlier — to $3.3 billion.

Net loan charge-offs were $243 million, up from $195 million a year earlier. Charge-offs within the CRE office portfolio were $50 million, in line with the previous quarter's level.

"Ultimately, we expect continued charge-offs on this portfolio," Reilly said.

He said nonperforming loans increased $200 million, or 9%, during the first quarter, "almost entirely driven" by CRE, which increased $188 million. Within CRE, approximately $150 million was related to the office portfolio.

Executives are focused on containing noninterest expenses. They noted multiple actions last year that they said would result in $750 million of cost savings in 2024. These included a $325 million workforce reduction and a $425 million 2024 "continuous improvement program" goal, "which we're well on track to achieve," Reilly said.

Meanwhile, the company is rolling out expansion efforts alongside its outlook for a brighter operating environment ahead.

The company during the first quarter said it would renovate more than 1,200 existing offices and open more than 100 new ones in pursuit of greater share in several major markets, including Dallas, Houston, San Antonio, Miami and Denver. PNC said it would invest about $1 billion in the effort, with the new branches getting built between this year and 2028. The bank currently operates approximately 2,300 branches.

"We're continuing to invest heavily in our franchise to drive growth and gain share, particularly in our retail banking technology platform, our payments businesses and our expansion markets," Chairman and CEO Bill Demchak told analysts on the earnings call.