Mid-Atlantic-based PNC Financial Services Group has made
a virtue of maintaining a conservative risk management strategy and
focused on expansion into affluent markets close to its Pittsburgh
headquarters. The bank’s latest results vindicate its decision to
steer clear of the subprime sector, writes Douglas

Almost alone among its rivals, PNC, the 11th-largest US bank by
deposits, has enjoyed a good third quarter and is optimistic about
its full year results. Addressing an investor conference in New
York on 13 November, PNC CEO James Rohr said that while PNC was
“not immune” to the widespread credit crunch enveloping US
financial markets, “the activities that are being hit the hardest
are places that we don’t focus on at all. The current turmoil
validates our model and we are performing better than our

PNC’s policy has been to steer clear of high-risk subprime lending,
adopt strict underwriting standards and significantly expand its
presence in the Mid-Atlantic region, particularly the affluent
markets of Baltimore and Washington, DC.

“We recognised the changing credit cycle early and did not go after
subprime, and I am very pleased to say that. We maintain our
discipline which is founded in a risk management culture to
maintain a moderate risk profile,” said Rohr. “We have focused on
our risk management strategy for some time and have been sellers of
credit [and] downsized our credit portfolio for the past five

In October, PNC reported third-quarter 2007 results that exceeded
analysts’ expectations and appeared to vindicate Rohr’s strategy.
Excluding a $1.3 billion gain last year from an investment in fund
manager BlackRock, PNC reported adjusted net income of $469 million
for the third quarter compared with $380 million for the same
period last year, thanks largely to solid customer growth and
higher asset management and brokerage fees.

PNC wrote off $49 million in loans and set aside $65 million for
future losses, compared with $47 million in loans written off in
the third quarter of 2006 and $16 million set aside for expected
losses a year ago. The bank’s retail banking division reported net
income of $250 million for the third quarter compared with $206
million for the same period of 2006.

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According to PNC, the 21 percent increase over the third quarter of
2006 and a 10 percent increase over the prior quarter were driven
by increased fee income and continued customer growth.


A key strategy

A high concentration of fee income is, said Rohr, “a
key strategy for growing the business [and] is a clear area of
differentiation from other banks. Almost 50 percent of our retail
banking revenue comes from fee-based products. It is a remarkable
figure, compared to some other banks [see bar chart
We like this revenue stream and have been able to grow
it consistently.”

In mid-September, PNC converted 231 Mercantile Bank branches and
approximately 500,000 retail accounts to PNC, having bought
Mercantile for $6 billion last year (see RBI 560), giving
it a greater presence in Maryland and Virginia and bringing its
branch network up to 1,072 spots. The acquisition fitted perfectly
with PNC’s stated strategy to target wealthy and well-educated
Mid-Atlantic markets. “We are winning in a region which is
attractive,” said Rohr.

According to PNC, the median household income in 2006 for its
clients was $58,648 and for Mercantile $69,363; the US average in
2006 was $51,546. PNC has developed a successful business model
based around putting relationship managers in its branches to cater
for this particular market segment, and has implemented several
related service programmes such as extended banking hours and
reformatted branches.

PNC’s branch network will be further boosted with its two latest
acquisitions, which cost about $1 billion in total: Yardville
National Bancorp, with 33 branches in New Jersey; and Sterling
Financial, with 67 branches in Pennsylvania, Maryland and Delaware.
Additional acquisitions are not ruled out by Rohr. “We will not go
to a new market like Florida [and] will not do a giant transaction.
We will see what comes up. We like faster-growing wealthy markets
but price is a big issue,” he said.

The bank reported that its current account relationships grew by a
net 22,000 between July and September, excluding Mercantile
activity. “We are focused on acquiring and retaining checking
accounts. It gives us tremendous opportunities to cross-sell
fee-based products and deepen relationships with our customers,”
said Rohr.

Non-interest income for the third quarter increased $86 million, or
24 percent, compared with the prior year third quarter and $7
million, or 2 percent, compared with the second quarter of

“We delivered strong earnings in the third quarter during a time of
extreme market volatility,” stressed Rohr.


Deposit advantage

A major part of PNC’s growth strategy has been its focus on growing
non-interest bearing deposits. “We are successful at it and our
team really does a spectacular job and it results in a funding
advantage. We have grown non-interest bearing deposits faster than
our peers and on a year-to-year comparison it is 22 percent to zero
[see table below].We do this through multiple channels
such as workplace banking, the universities, the branches and
treasury management,” said Rohr.

In May, for instance, Pennsylvania State University extended its
agreement with PNC for a combined ID card and bank card programme.
The agreement, initially set up in 2002, will now run until 2013.
The id+ card is issued to all of the university’s 70,000 students
and 16,000 staff and faculty members. The cards can be linked to
PNC bank accounts and used as debit or ATM cards.

According to PNC, it has one of the highest ratios of average
non-interest bearing deposits to average earning assets and a lower
cost of deposits than most of its peers.

PNC signalled its intention to become much more high profile in the
US retail banking market in September last year, in particular its
initiative to reimburse fees charged to its customers when using
ATMs at other banks. The move was part of a large-scale product-led
customer acquisition campaign that featured new current accounts
and loyalty rewards for banking transactions (see RBI


“Free ATMs has worked extraordinarily well,” said Rohr. “We are
growing our checking accounts and the average checking account has
a higher balance. We are also getting higher value customers
because of free ATMs.”

Rohr is also upbeat about PNC’s return to the credit card market.
In 2006, it launched a new credit card programme for its consumer
and small business customers, ending its relationship with MBNA,
which previously issued the bank’s credit cards. PNC had sold its
credit card operation to MBNA in 1999.

PNC now issues Visa-branded cards and, while rival US Bank is
responsible for back-office operations, card origination, risk
management and statement issuing, PNC is in charge of strategic
decisions, marketing, product development and setting credit
policy, and holds the receivables on its balance sheet. “The
[credit card] results, so far, are way ahead of our expectations,”
said Rohr.

Investment in the bank’s online channel is also paying off. “We are
seeing a big pay-off from a redesign of our website,” said

In the year to September 2007, the number of retail customers using
PNC’s online channel increased by 14 percent and there was a 67
percent increase in the number of customer using the bank’s online
bill payment facility.



PNC will intensify its branding and marketing efforts as it faces a
rejuvenated Commerce Bancorp, acquired in October for $8.5 billion
by Canada’s Toronto-Dominion Bank (see RBI 580). PNC has
competed with media-savvy Commerce for many years.

“They’ve been tough competitors, and I guess they will remain the
same,” Rohr told analysts at the bank’s third-quarter results

He said: “Our brand is one area where we are not as well [placed].
We have been very careful with the brand [and] we started by
talking to our customers and prospects – our prospects do not know
us very well. So we have brought in the Gallup Organisation to make
sure that our referral process and customer service is working
better. Our branding is moving forward and we’ll add some media
[activity] and you will start to see that rolling out next

PNC bags ‘green branch’ trademark

On 13 November the US Patent & Trademark Office highlighted
PNC’s environmental credentials by awarding PNC the trademark for
the term ‘green branch’.

To date, PNC has received Leadership in Energy and Environmental
Design (LEED) certification for 42 branches in six states, more
than any other company in any industry. LEED certifications are
granted by the US Green Building Council.

“The trademark is affirmation of PNC’s leadership in green business
practices during the past decade,” said Gary Saulson, director,
corporate real estate, PNC.

According to the bank, more than 50 percent of each green branch is
built from recycled materials, such as office furniture and doors
which are made from wheat board, a by-product of wheat processing.
Energy usage is reduced by 50 percent or more compared with a
traditional branch due to high-efficiency water, heating,
ventilation and air conditioning systems and insulation, and the
use of natural light is maximised.

“Consumers want to do business with socially responsible companies
and PNC is leading the way in the banking industry. We are
combining environmental building practices with innovative products
and services to help our customers achieve their goals,” said Neil
Hall, PNC’s head of retail distribution.

PNC is currently building additional branches to be certified as
environmentally friendly along with what it terms the largest
green, mixed-use building in the US, scheduled to open in
Pittsburgh in 2009, which will include offices, retail stores, a
hotel and flats.