PNC Financial Services Group in Pittsburgh set the tone for midsize banks by detailing how it plans to compete with megabanks and fintech firms for loans and deposits.
The $381 billion-asset PNC, the first major regional to report second-quarter results, provided more details on its plan to launch a national digital bank later this year. PNC will also continue to expand its middle-market business into
“Halfway through the year we feel good about our execution,” William Demchak, the company's chairman, president and CEO, said during a quarterly call with analysts.
“A relationship-based business model is working and that is creating growth opportunities for us," he added. "All that said, we have a lot of work to do in the back half of the year."
Despite industry chatter about more bank consolidation, Demchak made it clear that PNC is unlikely to pursue acquisitions. Rather, it is weighing more digital offerings and de novo branching. It had already disclosed plans to bring its middle-market business to Denver, Houston and Nashville, Tenn., this year.
Executives expressed optimism that loan growth will remain healthy throughout the rest of the year, especially for middle-market and specialty clients. Commercial real estate
As for funding loans, Demchak said PNC's digital bank could be a way to attract low-cost deposits.
“We want to be able to find a different channel to grow deposits because right now we have national loan growth capability against regional funding,” he said. “So long-term, we have an imbalance there.”
PNC has boosted its marketing efforts in advance of the digital bank's launch. The company
Therein lies the challenge for regional banks: finding ways to expand and compete while keeping costs in check.
PNC seemed to manage the balancing act between revenue and expenses during the second quarter. Revenue increased by 6.5% from a year earlier, to $4.3 billion. In comparison, noninterest expense in rose by 4.2%, to $2.6 billion, with heightened marketing contributing to the increase. The total number of full-time employees rose by about 3%, to 51,400 at June 30.
Executives told analysts that expenses should be stable in the third quarter, while revenue should increase slightly.
PNC also remains on track to hit its goal of cutting $250 million in expenses by the end of this year. Doing so will help offset the new investments and increased salary costs tied to the company's decision last year to raise its minimum wage.
PNC's branch network shrank by 3% from mid-2017, to roughly 2,400 locations.
Branches remain an important part of the strategy, Demchak said, because PNC believes most customers still want the option of meeting with a banker to address a problem. To support the digital bank, the company will add a few new branches in markets where it currently has no retail presence.
“In the handful of branches that we might have in a market, it’s just kind of a tipping stone to give somebody comfort that they're not dealing with the person behind the curtain,” Demchak said. “There’s actually a presence that they can go and talk to somebody if they need to.”
Physical locations could also act as billboards for the digital bank, similar to how Capital One Financial operates cafes in markets
While a step in the right direction, simply launching a digital bank is not enough to distinguish a bank from competitors, said Gerard Cassidy, an analyst at RBC Capital Markets.
“It is a ticket into the ballpark,” Cassidy said. “They still have to execute on the field. … The opportunity for all of these banks, including PNC, is having a straightforward way for customers to open checking accounts online. If they can achieve that, they will be executing quite effectively.”
Demchak is ready to see the experiment through.
"We've set it up to the best of our ability,” he said. “We're going to test and learn. My own belief is that, over time, we will see that succeed. I just don't know how long it's going to take.”
