PNC Financial Services Group, a bellwether for large regional banks, on Tuesday reported flagging earnings, falling deposits and
The Pittsburg company also projected weaker loan demand and lower net interest income through the third quarter. Chairman and CEO William Demchak pointed to the elephant in the room: soaring interest rates that have put upward pressure on deposit costs across the industry while pushing borrowers to the sidelines.
The Federal Reserve hiked rates
"You're seeing somewhat tepid loan growth largely because there's tepid loan demand," Demchak told analysts during the $558 billion-asset company's second-quarter earnings call Tuesday.
He said PNC is not making big efforts to attract new funding, such as certificate-of-deposit campaigns, but it is paying higher rates to both consumers and commercial clients to protect its deposit base. That noted, Demchak said he suspects other banks may disclose that they are chasing high-cost products to navigate a competitive deposit landscape.
"I think you're going to see that play out as earnings come out this week, where you're going to see some pretty extreme differences in what's happened to funding cost," Demchak said.
PNC estimated that its third-quarter average loans would fall 1% from the prior quarter, hampered by continued soft demand. Lighter lending combined with increased deposit costs could send net interest income 3%-4% lower in the current quarter.
For the second quarter, PNC said average loans declined less than a half percentage point from the previous quarter to $324.5 billion, with commercial loans down slightly.
Deposits fell to $425.7 billion from $436.2 billion in the previous quarter.
Net interest income of $3.51 billion was down 2% on a sequential basis. The bank's net interest margin of 2.79% decreased 5 basis points. PNC said higher loan yields were more than offset by increased funding costs.
For big regional banks broadly, Piper Sandler analyst Scott Siefers said he expects "softer lending trends to continue" and, on the deposit side, for "negative mix shift" toward more interest-bearing accounts "to remain a headache as it relates to costs of funds."
From a macroeconomic view, PNC Chief Financial Officer Robert Reilly said on the earnings call that the bank is "expecting a mild recession starting in early 2024 with a contraction in real gross domestic product of less than 1%." He said PNC's economic forecasts look for a 25 basis-point increase in the federal funds rate later this month. Following that, however, "we expect the Fed to pause rate actions until March 2024, when we expect the Fed to begin to cut rates."
Despite the economic fragility, PNC credit quality remains strong. Second-quarter net loan charge-offs were flat from the prior quarter, and nonperforming assets were 0.69% of total loans, down from 0.71% in the prior quarter. Its allowance for credit losses to total loans ticked up just 2 basis points during the second quarter to 1.68%.
"Credit quality is trending better than expected," Reilly said.
Second-quarter noninterest expense was $3.37 billion. That compared with the prior quarter total of $3.32 billion and the year-ago quarter of $3.24 billion.
PNC posted second-quarter net income of $1.5 billion, down 11% from the prior quarter and flat with its year-earlier bottom line.
On a per-share basis, the bank posted earnings of $3.36, compared with $3.98 the previous quarter and $3.39 in the year-earlier period. Analysts polled by FactSet on average projected earnings per share of $3.29.
