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PNC charge-offs nearly double YOY; CECL build comes in slightly higher

PNC Financial Services Group Inc. reported a near doubling of net charge-offs in the 2019 fourth quarter, but management said the increase did not represent any broader weakness in the economy or even a normalization of credit quality. Further, executives said the company's increase in loan loss reserves due to the adoption of a new accounting standard would be slightly higher than previously disclosed.

The bank reported $209 million of net charge-offs in the quarter, or 0.35% of average loans, up from $107 million, or 0.19% of loans, in the year-ago period. Relative to the 2019 third quarter, net charge-offs were also higher, increasing from $155 million or 0.26% of average loans. CEO William Demchak said the jump in charge-offs was driven by credit card and auto loans and a function of a decision about a year ago to offer loans to borrowers with weaker credit scores. He said the bank "shut that down" about six months ago.

"It's going to work its way through the snake here," Demchak said. "But I don't actually see, personally, that charge-offs are so much normalizing because of the economy, per se, as we have some elevated consumer stuff that will reverse through time."

Consumer loans were also behind the bank's higher-than-expected build in loan loss reserves to accommodate the current expected credit loss standard, a new accounting method that became effective for the bank Jan. 1. Management said adopting the standard would increase its allowance for credit losses by $650 million, or 21%, as of Dec. 31, 2019. That was modestly higher than management's previous disclosure of a 20% increase in its reserves. CFO Robert Reilly said the bank's reserve for consumer loans increased $900 million, or 95%, while its reserve for commercial loans decreased by about $250 million, or 12%.

In the 2019 fourth quarter, the bank's allowance for loan and lease losses represented 1.14% of total loans, a ratio that will increase to about 1.4% after implementing CECL. Asked about how CECL will affect the bank's reserve ratio on a go-forward basis, executives said it was exceedingly difficult to forecast.

"You'll drive yourself insane," Demchak said, noting that slight variations in product mix could have meaningful effects. "This thing is going to be really hard to predict. And what we have to do — and what we will do is give you, in effect, a provision attribution each quarter so that you understand where that comes from."