CEO says PNC 'not a player' in subprime loan fallout

Rohr: Bank had 'little exposure'

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PNC, the region's largest bank, has "minimal exposure" to the subprime-mortgage fallout now roiling through financial markets, according to Chief Executive Officer James Rohr, who expects the company to post a "strong performance" in the second half of 2007 despite the turmoil.

"We are not particularly concerned about these issues" because "we have not been a subprime player," he said yesterday during a Lehman Brothers investment conference in New York.

In fact, Mr. Rohr argued the volatility of the last few months actually "validates" PNC's recent business strategy -- one that mitigates the cyclical swings of consumer banking with more consistent streams of asset management and processing fees (it now collects 59 percent of its revenue from such fees). He also crowed about PNC's "strict credit discipline" -- citing as proof the company's low percentage of consumer loans in default (.8 percent) and just a 1 percent rise in Pennsylvania home-equity-loan delinquencies last month.

It's not as if PNC is a stranger to risky behavior. Missteps include commercial real estate loans that went sour in the late 1980s, big bets on interest rate investments that went south in 1994 and questionable accounting and record-keeping practices earlier this decade. But, "They have learned from their experiences," said Gerard Cassidy, banking analyst with RBC Capital Markets in Portland, Maine. "They do not want to go back to what they have experienced in the past," and instead PNC "has done a very good job of reorienting the company's business strategies to avoid the high-risk lending areas."

Contrast that to the Pittsburgh area's second-largest bank, National City Corp. The Cleveland-based institution currently has more than $7 billion in subprime loans (loans granted to customers with weak credit ratings) on its books.

Now that subprime delinquencies and foreclosures are on the rise, National City said last week it would cut 1,300 jobs (none in the Pittsburgh area) while scaling back its mortgage business.

"National City has run straight ahead into the problems that are affecting the industry," said Mr. Cassidy, citing the bank's subprime exposure and number of construction loans -- another area affected with credit problems.

About 14 percent of National City's loan portfolio comprises construction loans, compared with about 6.7 percent at PNC. "PNC has avoided those problems by not being in the subprime business at all and having limited exposure to the construction loan industry."

That difference is evident in share prices, as well. National City closed yesterday at $25.81, near a 52-week low and down about 29 percent on the year (the average bank stock is down about 13 percent year to date). PNC's shares are down less than 8 percent on the year.

Because of the turmoil, Mr. Cassidy believes that a "merger of equals" is "on the horizon" for National City. However, he does not think PNC would be interested in such a combination, since PNC is expanding farther northeast (70 percent of its branches are east of the Appalachian mountains) and its stock price might take a hit.

Asked about his appetite for more acquisitions, Mr. Rohr said, "We really haven't seen a lot coming to the table," and, "I like where we are in scale. I don't think we have to do anything at this point to change that."

During his appearance in New York yesterday, Mr. Rohr was upbeat about the U.S. economy despite the recent ups and downs. Inflation, he said, is still low, businesses still are making capital investments and the rest of the world continues to grow. He does not expect a recession, and instead he predicts the markets will churn through "liquidity issues" over the next couple of quarters.

As for National City, its "problems are not behind them yet," said Mr. Cassidy, the banking analyst, who believes that the stock will hit $21 or $22 "before it washes out." And as the credit conditions of the U.S. banking industry worsen, "All banks will witness deterioration, including PNC. Relative to most banks in the U.S., PNC should witness less deterioration than its peers. But it is our view that all banks will see deterioration."

Dan Fitzpatrick can be reached at or 412-263-1752.


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