PNC Financial Services Group grew its deposits during the first quarter, countering broader trends at regional banks in the wake of two high-profile bank failures.
But the cost to hold onto those deposits accelerated, and the Pittsburgh bank suggested that those pressures will likely continue to intensify this year. The $562 billion-asset bank's net interest margin, already on the decline, could further contract as a result.
In March, hundreds of billions of dollars exited the banking system in favor of U.S. Treasuries and money market accounts, according to Federal Reserve data. The outflows followed the failures of Silicon Valley Bank and Signature Bank — downfalls
The trend accelerated competition for deposits among banks, PNC executives said during a call with analysts Friday to discuss the company's first quarter earnings. And it amplified pricing pressure — particularly in the commercial deposits market — that was already growing amid the Federal Reserve's year-long campaign to tamp down inflation by hiking interest rates.
"The commercial side is where we expected to see a continued shift from noninterest-bearing into interest-bearing deposits as rates have risen, and that has played out," PNC Chief Financial Officer Robert Reilly said during the call. He added that the shift into interest-bearing accounts has happened at a
PNC's average first-quarter deposits were $436.2 billion, up from $434.9 billion the prior quarter but down from $453.3 billion a year earlier.
The average rate the bank paid on interest-bearing accounts rose to 1.66% in the first quarter from 1.07% the prior quarter and 0.04% a year earlier. Interest-bearing accounts made up 73% of PNC's first-quarter deposits, up from 67% a year earlier.
Investors are looking at PNC as a bellwether for a slew of regional banks slated to report results next week, Goldman Sachs analyst Ryan Nash said in an interview.
He said the largest banks are clearly perceived as "safe havens" for deposits, given that they are likely viewed by regulators as too big to fail. Still, banks that are growing deposits may face intensifying cost and margin pressure, he said.
"This is something that's going to be a lot more front and center," Nash said of both the shift to more interest-bearing accounts and overall higher deposit costs.
PNC, which has total assets of $562.3 billion, is bracing for both of those outcomes. It expects the Fed to raise interest rates again in May and then hold its benchmark rate steady through the end of 2023. Rates are currently at their highest level since the aftermath of the 2008 financial crisis.
PNC's net interest income of $3.6 billion in the first quarter was down 3% from the previous quarter but was up 28% from a year earlier. Its net interest margin of 2.84% decreased eight basis points from the fourth quarter, though it was up 56 basis points from a year earlier. The quarter-over-quarter declines were driven by higher funding costs.
"We kind of think the Fed's going to hold through the year and cut next year," PNC Chairman, President and CEO William Demchak said on the call. Noting that inflation remains stubbornly high, he added a caveat: "Personally, I think they might hold longer than that."
"Separately, we have seen just this heightened awareness of interest rates and what you do with deposits on the back of the banks that have failed," Demchak said.
If rates hold higher for longer, community banks will "really need to pay up super-high rates to fund their balance sheets," Demchak said, which would drive up funding costs for bigger banks that want to protect their balance sheets. It could be "painful for us" in terms of pressure on interest income and the bank's margin, he said.
The pace of lending also is slowing, which means PNC cannot rely on strong growth in interest income to fully offset rising deposit costs.
PNC's average loans for the first quarter were $325.5 billion, up from $321.9 billion in the prior quarter and from $290.7 billion in the year-earlier quarter. The bank expects average loan growth of 5%-7% for all of 2023 — down from a previous outlook of 6%-8%. The bank cited
"We are expecting a recession starting in the second half of 2023, resulting in a 1% decline in real GDP," Reilly said.
During the first quarter, PNC reported net income of $1.69 billion, or $3.98 per share, up from $1.55 billion, or $3.47 per share, during the prior quarter. Net income was also up from $1.43 billion, or $3.23 per share, a year earlier.
The company posted revenue of $5.6 billion, down from $5.8 billion the previous quarter but up from $4.7 billion a year earlier.
