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PNC reports slip in 2Q earnings as low interest rates hamper banks

| Friday, July 15, 2016, 8:00 a.m.

PNC Financial Services Group Inc. won't chase risky loans in search of bigger returns despite challenges to grow revenue as interest rates look to stay lower for longer.

The Downtown-based bank has faced the same predicament as its peers, with low interest rates hampering their ability to make money on lending. PNC, Wells Fargo and Citigroup all reported sliding second-quarter profits on revenue declines.

PNC officials also lowered their outlook for the year, anticipating that revenue for the rest of the year would be stable, instead of the modest growth they had expected.

Investors reacted negatively; the bank's share price closed down 80 cents, or 0.97 percent, to $82.06.

Some banks have responded to the revenue pressures by getting more aggressive in their lending and relaxing standards to grow their loan portfolio while competition for the most creditworthy customers is tight.

That is not a strategy PNC will pursue, CEO Bill Demchak said.

“We're not going to respond to market uncertainty by suddenly changing our risk profile and/or stretching on credit,” Demchak told analysts on a conference call Friday morning.

Instead, PNC will focus on generating more fee income and controlling costs. Halfway through the year, it is two-thirds of the way to its goal to shave $400 million in expenses in 2016, CFO Rob Reilly said.

PNC also is looking to lower costs long term by investing in technology to become more efficient. That includes steering customers to mobile banking, closing branches and converting existing locations into a tech-savvy model known as a “universal branch.”

The new model responds to a consumer trend in which fewer people are visiting branches as they do more banking online. At the universal branch, customers handle transactions themselves on supercharged ATMs, freeing up PNC staff to sell financial products to customers rather than perform basic transactions such as cashing checks.

If interest rates remain low for much longer, PNC might want to step up efforts to drive customers to less-costly online banking services and reduce its branch network, said Gerard Cassidy, a banking analyst at RBC Capital Markets in Portland, Maine.

“At some point, if this rate environment stays this way, PNC and their peers are going to have to take a much harder look at their retail branch systems,” Cassidy said.

PNC hopes to have two-thirds of its branches converted to the universal model by 2019. So far, 467 of the 2,600 branches are operating under the new format.

The pace of those conversions could come faster as the bank gets better at training staff and renovating spaces, Demchak said. But there are no plans to ramp up those conversions.

“I think we're going at the right pace,” Demchak said. “That's less about how much money you're willing to spend or want to save and more about executing in a way that you don't disrupt customers.”

Morningstar analyst Jim Sinegal said PNC still can achieve its goal for branch conversions by 2019, but said pushing back the timeline could be beneficial because it would give the bank more time to play with the format.

“I, personally, think banks are still experimenting with the branch format,” Sinegal said. “The speed with which technology is changing, the idea that you know exactly what you want your branch to look like in 2019 is a little bit aggressive.”

PNC's patience in holding credit standards high will be tested, however, the longer interest rates remain low, Sinegal said.

Many economists are predicting that the Federal Reserve will wait until December for the next increase in its benchmark short-term lending rate. Banks have been increasingly willing to lend money to subprime borrowers through products such as auto loans. PNC, meanwhile, has focused on only the most credit­worthy borrowers, where competition is fiercest and loan yields are tight.

PNC's net interest margin, a key measure of lending profitability, declined to 2.7 percent in the second quarter, compared with 2.73 percent a year ago.

“Especially on the consumer side, I think there's something to be said for getting more aggressive in terms of credit risk,” Sinegal said.

Still, PNC's performance in the second quarter was solid, Sinegal said.

The bank reported net income of $914 million, or $1.82 per share, in the quarter that ended June 30. That was down from $987 million, or $1.88 per share, in the same period last year but still beat Wall Street expectations.

Revenue was $3.79 billion, down 2 percent from $3.87 billion a year ago. Non-interest expense fell slightly to $2.36 billion, down from $2.37 billion in the second quarter of 2015.

PNC's revenue struggles were not just related to a tough lending environment. Non­interest income was down 5 percent from a year ago, partly because of a drop in asset management revenue, offsetting growth in fees.

Chris Fleisher is a Tribune-Review staff writer. Reach him at 412-320-7854 or cfleisher@tribweb.com.

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