Uncertainty pushes PNC to boost bad loan reserves

Uncertainty surrounding the U.S. economy — how bad it might get and how long it might take to recover from the effects of the pandemic — pushed PNC Financial Services Group to boost its provision for credit losses to nearly $2.5 billion in the second quarter as a sandbag against a potential tsunami of bad loans.

“Our view of the economy has substantially worsened since we closed the books three

months ago,” Chairman and CEO William Demchak told analysts in a conference call Wednesday.

“While recent economic data has been encouraging, we are still in the very early innings of how this is going to play out. Massive fiscal and monetary stimulus has allowed us to in effect kick the can down the road,” he said. “In terms of feeling the real effects of this recession, much is going to depend on continuing support from the government.”

Right now, he said, most businesses are hurting, while consumer deposits with Pittsburgh’s biggest bank are growing.

“Customers who are receiving unemployment on average have higher balances than they had when they were employed, which in turn is driving consumer spending and part of this economy,” Mr. Demchak said.

“We see consumers flush with cash, we see consumers with no delinquencies. We see consumer spending increasing and it’s all at the moment based on the government writing the check.

“I don’t know how this plays out,” he said. “It is really unclear what the longterm damage is going to be in the economy [from COVID-19] and how long it is going to take to get back.”

For PNC, financial results in the second quarter were “pretty solid” given the economic environment, Mr. Demchak said.

The Pittsburgh-based bank posted a huge profit of $3.59 billion, or $8.40 a share, for the three months ending June 30. That compares with $1.3 billion, or $2.89 a share, in the same quarter last year.

But that was due only to the after-tax gain on the sale of PNC’s roughly 22% stake in money manager Blackrock Inc.

Excluding the Blackrock sale, PNC lost $744 million in the quarter, or $1.90 per share, owing to the big buildup in the bank’s loan loss reserves. The bank boosted its reserves to $2.46 billion — up from $914 million in the first quarter and $180 million in the second quarter of 2019.

Actual loan losses were fairly stable from the first quarter, with net charge-offs rising 11% to $236 million. But charge-offs, which are debts that are unlikely to be collected, were up 66% from the same quarter last year.

Revenue for the quarter slipped 3% to $4.08 billion from $4.21 billion a year earlier.

Mr. Demchak has said PNC is looking to make a major acquisition with the roughly $14 billion it netted from the sale of its Blackrock stake, but only if the price is right.

On Wednesday, he said he would take his time looking for the right opportunity, hanging on to the capital to see how the recession plays out.

“The fiscal payments that the government’s put out, plus what the [Federal Reserve] has done has effectively masked what are some pretty severe underlying problems with the economy,” he said.

“So we are going to be patient.”

PNC’s shares were up $1.73, or 1.7%, to $102.99 a share in afternoon trading Wednesday. Shares closed at $104.07, up $2.81 or 2.78%.