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PNC fourth quarter slightly off 2013 mark

| Friday, Jan. 16, 2015, 9:06 a.m.

PNC Financial Services Group ended 2014 with a decline in revenue and profits amid a lackluster fourth quarter for many large U.S. banks.

PNC's net income for the quarter that ended Dec. 31 was $981 million, or $1.84 per share, compared with $1 billion, or $1.87 per share, a year ago. For the year, PNC had profit of $3.918 billion, or $7.30 per share, compared with $3.916 billion, or $7.36 per share, in 2013.

Friday's earnings report underscored the challenges facing the banking industry because of low interest rates and volatility in the stock market. Bank of America and Citigroup this week also reported plummeting profits in the fourth quarter, hurt by slumps in trading and low rates.

“Interest rates are ultimately the largest challenge to our bottom line in 2015,” PNC CEO William S. Demchak told analysts in a conference call. “Competition continues to get tougher.”

PNC, the Pittsburgh region's largest bank, grew its total loans 5 percent in the fourth quarter from a year ago as improvements in the economy boosted commercial lending. But it was not enough to grow revenue. Total revenue fell 3 percent for the quarter, to $3.95 billion, from $4.07 billion a year earlier. For the year, PNC's revenue fell 4 percent to $15.38 billion.

The net interest margin, a measure of lending profitability, fell to 2.89 percent for PNC in the fourth quarter compared with 3.38 percent in the previous year.

The bank still beat many analysts' expectations, and shares rose $2.02, or 2.45 percent, to $84.44.

The Federal Reserve has held its benchmark federal funds rate near zero since 2008 to stimulate demand for lending. The job market added the most workers last year since 1999, and most economists expect the Fed to raise rates sometime this summer as the economy improves. Until then, banks will struggle to make money from lending.

PNC will focus on disciplined expense control and refuse to chase risky business amid increasing “irrational competition,” Demchak said.

PNC has focused on cutting costs through shrinking its retail branch network and using technology to become more efficient. Last year, it closed 50 branches and has shuttered 240 locations since 2013.

Non-interest expense was $2.54 billion in the fourth quarter, 1 percent higher than the same period in 2013. Expenses declined 2 percent for the year, falling from $9.68 billion in 2013 to $9.49 billion last year.

PNC cut $500 million in costs in 2014, and Demchak said it intends to slash $400 million this year. But those savings are not necessarily going to show up as expense reductions because the money is being reinvested in technology to help the bank meet regulatory requirements.

Those are the types of investments banks need to make despite the revenue pressures, said Dan Werner, an equity analyst at Morningstar.

“(PNC) continues to manage the expenses side very well, reinvesting in the business with those savings,” he said. “It's a difficult operating environment for all banks, with the regulatory requirements, additional capital. ... The things that are facing them in headwinds are largely out of their control.”

Banks have turned to other fee-based portions of their business to grow revenue while interest rates are low.

PNC's non-interest income, or earnings from fees and other charges, increased $43 million, or 2.4 percent, in the fourth quarter from the same period in 2013. Growth in asset management and corporate services have covered some of the declines from the residential mortgage business.

“Cash management, check clearing for other corporations or businesses. Those are the two area where they're showing the most momentum,” said Marty Mosby, an analyst at Vining Sparks.

Analysts on Friday's call questioned whether PNC's loan exposure in the energy industry put it at risk amid falling oil and gas prices. PNC's ties to energy sector were small, and loan losses related to falling oil prices would be made up for by the larger economic benefits to consumer spending from low gas prices, Demchak said.

“We're not sweating that yet,” he said.

Chris Fleisher is a staff writer for Trib Total Media.

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