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PNC to increase cost-cutting to maintain profit momentum, CEO says

| Thursday, Jan. 17, 2013, 10:04 a.m.

Though PNC Financial Services Group's profit jumped 47 percent in the fourth quarter, its CEO said Thursday the bank likely will cut $700 million in costs this year to maintain that profit momentum.

“We have to continue taking expenses down, there's no question about that in this low interest-rate environment,” CEO James Rohr told analysts on a conference call. Low interest rates cut into what banks can earn on investments and loans.

PNC shares closed at $62.01, up $2.23.

The bank planned to reduce operating expenses about $500 million in 2013. Rohr said PNC would adopt the higher, $700 million, cost-cutting target because interest rates probably will not rise and because the pace of economic growth is unlikely to pick up significantly.

Rohr said most of the cost reductions would come from its retail banking business. PNC would save money as customers shift from doing business through tellers at branches, which costs nearly $4 per transaction, he said. By contrast, an ATM transaction costs about 85 cents, and an online transaction costs about 17 cents, according to industry research. PNC is a leader in deploying alternate banking methods for customers.

PNC posted a quarterly profit of $664 million, versus $451 million a year earlier, on stronger results from its retail and corporate banking segments, particularly from growth in loans.

Total loans of $186 billion at yearend were 17 percent above year-ago levels, and 2 percent ahead of levels on Sept. 30. About $109 billion were commercial loans, with growth in the health care, public finance and real estate segments.

Consumer loans grew 9 percent to $77 billion, including more than $15 billion in home loans, a 33 percent increase from a year earlier.

“PNC's residential mortgage business was quite strong in the fourth quarter, said Gerard Cassidy, an analyst at RBC Capital Markets in Portland, Maine. He said PNC's commercial loan growth was “favorable,” as were other big banks' last quarter.

The earnings equaled $1.24 per share, compared with 85 cents a year earlier. The results include one-time charges equaling 47 cents a share, disclosed last week, related to its home mortgage business and other issues.

Rohr told analysts he was “pleased but not entirely satisfied” with PNC's results because they didn't fully reflect the bank's potential.

The bank added 254,000 checking accounts in 2012, for example, on top of 460,000 accounts obtained from its acquisition of RBC USA's franchise in the Southeast in March.

Retail banking income doubled to $121 million in the fourth quarter from growing loan volume; corporate banking grew nearly 9 percent to $649 million.

The one-time charges amounting to $390 million relate to the bank's home-mortgage banking business, including $70 million that was part of a recent 10-bank settlement with the government over improper lending practices. The entire $8.5 billion settlement with regulators covered 3.8 million homeowners in foreclosure in 2009 and 2010.

Included in that $390 million was $254 million PNC paid Fannie Mae and Freddie Mac last quarter to buy back mortgages the bank sold to them.

“The question that's hard to answer is, what comes next?” said Terry McEvoy, an analyst at Oppenheimer & Co. “Will those expenses continue to elevate or go back to an environment where those costs normalize?”

Rohr told analysts: “Hopefully, we won't have the same mortgage charges in 2013.”

Thomas Olson is a staff writer for Trib Total Media. He can be reached a 412-320-7854 or at tolson@tribweb.com.

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