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PNC talks energy, increased provisions for credit losses

Executives of Pittsburgh-based PNC Financial Services Group Inc. shed light on the bank'sincreased provisions for credit losses during an April 14 earnings call.

Elaborating on the company's energy portfolio, Chairman, Presidentand CEO William Demchak said the bank has not seen the end of nonperforming loanscoming from the energy space. Within areas related to energy, Demchak described"a couple of lumpy credits" that existed in the first quarter.

"We're not going to see us grow the loan book inside theenergy space anytime soon," he added.

PNC's provision for credit losses was $152 million, up from $74million in the previous quarter and $54 million in the first quarter of 2015. Thefirst-quarter 2016 provision included $80 million for loans in the oil, gas andcoal sectors, as opposed to $23 million in the prior quarter. Driven by higher nonperformingcommercial energy-related loans, nonperforming assets rose quarter over quarterto $2.55 billion from $2.43 billion.

In his prepared remarks, CFO Robert Reilly pointed out that coal"significantly contributed" to the bank's provision.

"Going forward, however, while coal prices remain underpressure, our overall portfolio is small and our remaining risk is concentratedin a handful of specific credits," he added.

Outside of the nonperforming loans in the energy portfolio, Reillycalled the consumer and commercial portfolios "benign," as they helpedoffset the change in energy. PNC's consumer portfolio has been influenced by runoffin the student loan book and the home equity space, executives said. Executivesexplained that the bank has held its auto lending steady compared to other banksto avoid risk in the space.

In terms of managing energy exposure and customer access to unusedlines of credit, Demchak said the bank will have to go "sector by sector andcredit by credit."

With respect to guidance, Reilly said that PNC expects "modestgrowth" in revenue and stable expenses for the full year of 2016. In the secondquarter, he said the bank expects "modest growth" in loans and "modestincreases" in net interest income. Reilly also pointed out that PNC expectsfee income to increase 10% to 12%, expenses in the "mid-single digits"and provisions between $125 million and $175 million.

Reilly spoke to the makeup of PNC's provision guidance, explainingthat excluding energy at a base level, the bank expects credit costs to normalizefrom the low levels experienced in 2015, but "not at a rapid rate."

"I think when you take a look at the second quarter, mostof the variance will be driven by what results from the energy portfolio, and that'swhy we've built that into our guidance," Reilly added.

In an April 14 note, Evercore ISI analyst John Pancari calledthe energy drivers "not surprising."

With respect to M&A, Demchak said the bank is in the market. "I don'tsee value there," he added. "I think there's many other things that wecan spend our capital on to offer a better return to shareholders."

Executives also gave an update regarding the bank's of the clearXchangepeer-to-peer network.

"We are creating a real-time P2P payment network that'sgoing to be a ubiquitous offering that we would like to get out into every bank'shands in the country," Demchak explained. He pointed out that the network is"entirely different" than the bank's updates to its automated clearinghouse payments systems. "Whether or not that takes some or all of the volumeoff of ACH through time, we'll wait and see," Demchak added.

PNC reportedfirst-quarter net income attributable to common shares of $850 million, or $1.68per share, compared to $926 million, or $1.75 per share, in the first quarter of2015. The S&P Capital IQ consensus normalized EPS estimate for the most recentquarter was $1.70.