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While many bankers cite new regulations or the sluggish economy as their primary challenges, PNC's CEO-in-waiting said that an even bigger hurdle could be figuring out how to charge customers for products and services that banks currently give away for free.
March 14 -
Lenders are lowering rates and stretching out loan terms to win business, and that combination could spell trouble when interest rates rise.
February 28 -
After 10 years of helping to build up expectations at PNC, Bill Demchak will have to surpass them after he becomes CEO this spring.
February 20 -
PNC says it is playing the game straight. It's just not sure everyone else is.
William Demchak, the Pittsburgh company's president and incoming CEO, argues that PNC Financial Services Group (PNC) made $1 billion last quarter because it has stuck to the strategy laid out by the man he will succeed this month, Jim Rohr.
Commitment to cost-cutting, specialty lending and improving
"We're not changing the direction we're going in," he said in a conference call on first-quarter results Wednesday."We have a lot on our plate and a lot that we can do organically."
The call, which Demchak handled without Rohr, was a relaxed affair given PNC's relatively steady performance. Commercial loans grew about 1% in the first quarter, to $110.3 billion, largely on the strength of specialty lending sectors such as public finance and asset-based lending.
Deposits rose by less than a percent from the fourth quarter, and its regulatory capital ratio rose from 9.6% at the beginning of the year to 9.8% at March 31. Total revenue, at $4 billion, was up 6% from a year earlier but down 3% from the fourth quarter of 2012.
First-quarter expenses declined 15% since yearend, to $2.4 billion, a result that "clearly exceeded our expectations,"
Of a $700 million in annual cost savings targeted for the end of this year, PNC already has reached about $500 million. It will "easily" hit that mark, Johnson said.
"We actually added customers this quarter while closing 30 branches in the first quarter," said Johnson, noting that the
Demchak was more skeptical about the broader commercial lending environment. Although loan terms have not deteriorated to the point they did in the middle of the last decade, "people are chasing assets," he said.
PNC is "losing deals" for smaller commercial loans to competitors offering credit with weaker standards over longer periods. And since PNC began concentrating on indirect auto lending, that market has become overcrowded, too, Demchak said.
"The spread levels have kind of gotten down to the point where our returns on equity are basically at the margin," he said.
The comments echoed comments by Huntington Bancshares (HBAN) executives, who
"In the last quarter we actually saw more instances of structural give-ups, and so there were probably more instances where we actually had to walk away from deals because of structure," Huntington Chief Credit Officer Dan Neumeyer said.
But Demchak said that PNC has options aside from handwringing. Yields on large commercial credits are "still sane," he said. "We're gradually grinding our way lower, but we're not through the threshold where we won't see decent returns on credit."
The RBC USA acquisition offered PNC another out. As spreads continue to tighten, "we will gradually change our focus from new loan balances to cross-sell and harvest all the new clients that we added over the last couple years," he said.
Despite
Although there is an irony to industrywide c
"PNC has had a good track record of calling [irrational competition] in the past and walking away from categories where it's a problem," he said in an interview after the call. Integrating its RBC Bank (USA) acquisition gives PNC other opportunities.
"The RBC concept is buying something cheaper and putting sweat equity into it. It leverages your franchise value," Orenbuch said.
The mellow tone of Wednesday's conference call suggests that Demchak, who has been with the company 11 years, is comfortable stepping into the CEO role.
He and Johnson spoke fluidly about PNC's progress and acknowledged a few missed calls. Last year the company announced that it planned to expand its mortgage origination capacity; asked about that on Wednesday Demchak readily conceded that it had fallen short of expectations.
"Competition for people frankly got pretty fierce, and our ability to add the heads we expected just wasn't there," he said. "So I was wrong."
It's the sort of error that most banks would be happy to live with.
"People
