PNC’s $3.45 bln deal shows banks’ growth dilemma

June 20, 2011

By Antony Currie
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

PNC’s $3.45 billion swoop on Royal Bank of Canada’s U.S. retail branches highlights the growth dilemma facing American banks. Thanks to improving balance sheets and regulatory pressure, financial institutions have been building up capital. But there are few new lending opportunities on which to deploy the money. That leaves consolidating with rivals and cutting costs as the primary avenue to juice returns.

Take Pennsylvania-based PNC. The bank ended the first quarter with Tier 1 common equity — the most prized measure of capital — at more than 10 percent. At the time, management also expected to end 2012 with a Basel III capital ratio around the same level — and so already in compliance with the so-called systemic financial institution buffer that all big U.S. banks are expected to maintain.

But loan growth has been flat across the industry, especially for consumer lending. Throw in new rules limiting overdraft, credit and debit card fees and banks’ bottom lines are suffering — pre-tax, pre-provision profit actually fell at many firms in the past few quarters. As releases from loan loss reserves slow, net income will come under more pressure. And with more capital stockpiled, returns on equity are suffering, too.

That makes acquisitions more attractive. First, bank executives can always crank out cost savings. PNC Chief Executive James Rohr reckons he can slash 27 percent of the RBC unit’s expenses. Once taxed, discounted and capitalized, those are currently worth around $1.5 billion to shareholders — more than the $1 billion in market value wiped off PNC’s stock since word got out that it was likely to buy RBC’s branches.

Then there’s the hope that a larger combined operation, with a healthy balance sheet, can attract more business — PNC now picks up a decent operation in the higher-growth Southeast and should be more committed than Toronto-based RBC, which had suffered almost three years of losses and internally debated its long-term U.S. strategy.

But acquisitions have their challenges, too. PNC doesn’t expect to turn a profit for investors until 2013. Similarly, PNC’s rival Capital One may have picked up $83 billion of cheap deposits buying ING Direct last week, but it now needs to find more profitable loans, too. Shareholders don’t seem too impressed on either account. But for now, there’s not much else that will find favor, either.

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