PNC's loan growth remains just out of reach

PNC Bank
Pittsburgh-based PNC reported net income of $1.51 billion Tuesday, powered by strong increases in noninterest income.
Jamie Kelter Davis/Bloomberg

UPDATE: This article includes comments from a conference call with executives and from analyst research notes.

PNC Financial in Pittsburgh reiterated its forecast calling for record-high net interest income next year, though just how big of a contribution loans will make in 2025 remains a mystery, according to Chairman and CEO Bill Demchak.  

For now, loan growth remains stubbornly stuck in neutral. Demchak has given up predicting when things might kick into a higher gear. "I could come up with 10 different theories on why loan growth hasn't been there and when it might come back," Demchak,  American Banker's 2023 Banker of the year, said Tuesday on a conference call with analysts. 

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Chairman and CEO Bill Demchak

The $565 billion-asset PNC reported third quarter financial results, with revenues growing 4% from a year ago to $5.4 billion. Effective cost control led to a third consecutive quarter of positive operating leverage — with revenue growth outstripping increases in operating expenses — though an increase in funding costs resulted in a 4% decline in net income from September 30, 2023. Third-quarter profits totaled $1.51 billion. 

While average loans of $3.19 billion were level with the third quarter of 2023 and actually down slightly from June 30, there was some cause for optimism, Chief Financial Officer Robert Reilly said. An increase in customers has led to more outstanding lines of credit. "Our commercial clients are putting those lines in place with the anticipation of borrowing," Reilly said on the conference call. "It does feel we're at the point in the cycle where loan growth is not that far off."

Still, as things stand, loan growth remains slow. "The whole year we've yet to deliver the loan growth that we thought was coming," Reilly said.

While net interest income was essentially flat compared to the third quarter of 2023, PNC did see solid growth in fee-income business lines, especially capital markets and advisory income, which totaled $371 million, more than double the amount reported at Sept. 30, 2023. Card and cash management income of $698 million rose 1% from a year ago, though PNC moved in June to slash credit card late fees to $8.

PNC's deposit picture was similarly bright. Average deposits of $422.1 billion were in line with the total a year ago, but they were up more than 5% on an annualized basis from June 30. "The outperformance in our deposit balances came on the commercial interest-bearing side," Reilly said. "Commercial clients continue to build cash on their balance sheets. Our expectation is that will hold, for the most part, through the end of the year."

PNC reported continued stress in its $7.2 billion office loan portfolio as criticized office loans migrated to nonperforming status, Reilly said. At $95 million, third-quarter office charge-offs equaled about a third of PNC's $286 million total for the three months ending September 30. "Going forward, we expect additional charge-offs on this book, the size of which will vary quarter-to-quarter," Reilly said.

"Office vacancies — pick your market —are quite high," Demchak said. The company is adequately reserved, he was quick to add. "I'm not worried about it, per se, from PNC's standpoint, but it's going to be noisy for a while," Demchak said. "To the best of our ability, we've taken all [office losses] up front." 

Noninterest expenses rose to $3.3 billion from $3.2 billion, primarily due to a 5% increase in personnel costs, although the number of employees fell to 55,249. PNC a year ago announced plans to trim its workforce by 4%. In February, PNC announced plans to renovate more than 1,200 existing branches and open more than 100 in new markets across Texas, as well as Miami and Denver. Demchak is counting on the investment in the retail distribution system, especially the market expansion, to drive much of PNC's anticipated 2025 growth. 

"My historical comments on the need for scale are still true," Demchak said. "It just looks like the way we're going to have to get there, at least in the near term, is through investment in organic growth."

Mergers and acquisitions are not a high priority. "We don't see value in an acquisition at the moment," Demchak said.

Both investors and analysts seemed satisfied with PNC's third-quarter results. The stock price was up more than 3% in midday  trading at $194.32. David Rochester, an analyst who covers PNC for Compass Point, characterized its earnings report as "generally favorable." Rochester cited "stronger deposit growth than expected and contained credit trends" in the research note he published Tuesday. 

"Our results for the third quarter demonstrate PNC's continued strong momentum across the franchise," Demchak said in a statement.  "We increased tangible book value, grew customers and continued to strengthen our capital levels. We remain well positioned to capitalize on opportunities and achieve record [net interest income] in 2025."

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