PNC Bank: Troubles in Financial Crisis (Bank Crisis 3.0)

This article is a summary of the YouTube video ‘Trouble at PNC Bank as Layoffs Start, Loan Activity Stalls (Bank Crisis 3.0)’ by RJ Talks

Written by: Recapz Bot

Written by: Recapz Bot

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US economy changes and PNC Bank impacted by Fed’s policy.

Key Insights

  • Changes in the US economy and a major US bank are occurring as a result of the Fed's tighter monetary policy.
  • PNC Bank, known for its strength and efficiency, is also feeling the impact of the end of easy money.
  • The era of higher inflation and yields is leading to significantly lower profits for banks, including PNC Bank.
  • The Fed has been cautious in raising rates due to the results of the Senior Loan Officer Opinion Survey (SLOOS), which indicates a decrease in lending and tightening of credit standards by banks.
  • A historical pattern suggests that a recession follows when banks tighten lending standards and the SLOOS index breaks 60.
  • Banks' decreasing willingness to lend poses a risk to the current "everything bubble" in the economy.
  • PNC Bank, despite being considered one of the strongest regional banks, has reported a drop in profit and is implementing job cuts due to higher interest rates affecting profitability.
  • Banks like PNC are struggling with net interest income being reduced as a result of the Fed's quantitative tightening policy.
  • The current trend of investors moving their deposits into money markets and treasuries to safeguard their funds is affecting bank liquidity.
  • PNC Bank's unsuccessful bid to acquire First Republic Bank and their recent purchase of a loan portfolio indicate their efforts to adapt to the changing landscape.
  • A high inflation, high yield world is emerging, favoring real assets as potential winners in the current economic environment.
  • Even strong regional banks like PNC are not immune to the tightening measures and challenges posed by the current economic conditions.

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[00:00:00] All right, we have more changes unfolding in the US economy and over at a major US bank. Changes that have the Fed’s tighter monetary policy clearly taking its toll as the second largest regional bank in the country. A bank known to be exceptionally strong and one of the best run institutions in the banking industry. Well, even they are now feeling some pain as the era of easy money is over. We’re now in the decade of higher inflation and yields, which means substantially lower profits for banks.

So much lower, in fact, that even PNC Bank, a bank that was supposed to be solid, one of the best run banks in the country, well, even they are suffering the consequences, the jawboning by the Fed. So we’ll look at what just happened to PNC, how they’re trying to get ahead of this, where the flow of money has been moving that’s putting them in such a vulnerable position because there’s a reason that this is happening. It’s the reason why the Fed’s been so careful lately, chose not to hike the overnight rate these past few meetings. It’s because there’s something that they’re waiting to see, something that all of us will see in just two more weeks.

But before we get started, press the like button and subscribe. It’s totally free to do. It’s just a click of the mouse helps me out and I appreciate your support. So the FOMC, the Federal Open Market Committee, a group of Fed presidents and governors who get together eight times per year behind closed doors and decide the future of all of our economic policy. Well, we have two more weeks, folks, before the next meeting. And since their last two meetings were just duds holding rates steady at 5.5%, many market observers are speculating that they’ll raise rates again after the bonanza of new jobs created last month, 336,000 new jobs created in September.

At least that’s according to the government, the BLS, the Bureau of Labor Statistics. But even if we take their number at face value, small potatoes in the bigger picture as the most important number, the most important report that these FOMC voting members are waiting to see, report that we’ll see in two weeks as well, isn’t the jobs data. The jobs data is important too. But what’s even more important, what the Fed sees as critical before making any decision to change the overnight rate again, is seeing the results of SLUS, the Senior Loan Officer Opinion Survey, hands down the most important report in this current like econ cycle, the report that allows them to get a glimpse of what’s coming as it lets us watch the banks, the institutions who actually create new money as that’s how our system works, right? Money is created when banks write new loans.

And for the past 26 months, banks have been less and less willing to do so. Like you see on this chart, the higher this line goes, the more banks have tightened lending standards, made it more difficult to obtain financing. The average is around 15%. The red shaded areas are recessionary periods. What do you notice each time that this happens? Every time this line breaks 60, a recession follows shortly thereafter.

Back in 1990, lenders stop lending, boom, recession. Again, during 2000, banks make it tighter and tighter. We hit 60 and boom, the dot com bubble pops and we enter recession. During the run up to the Great Financial Crisis, what was happening? Banks were tightening loan standards while the Fed was raising rates and boom, recession. Saw the same thing a few years ago. And again, today, right now we are on our way to deflating this everything bubble that we’re currently living in if banks stay on course like they’ve been since July 2021. 26 straight months of credit retraction.

This is what the Fed’s watching, what they are waiting for, why they need to be so cautious right now, and why they waited to hike the last few meetings. You hear people say all the time, like, why does the Fed not just raise rates already? Why pause? If they’re going to do it, then just do it already, right? Well, this is the reason. Hiking again before knowing just how much banks have tightened up shop could be a huge mistake. This process, limiting credit availability in a system that relies on credit for just about everything is just as effective, if not more effective at all, as rate hikes are. And the Fed knows it.

Also, this chart that we’re looking at is just for business loans, by the way. How difficult banks have made it for small businesses to obtain financing? Well, what about CRE, commercial real estate, even tighter folks? Well, well over 60 now at 71% tighter, virtually as difficult today to get a loan for CRE as it was during the worst days of the great financial crisis. And we all know what’s happened to CRE this past year. Real estate investors unable to refi their properties, which the vast majority have to do every few years.

Commercial real estate loans have floating rates, adjustable mortgages, very different debt structures than most residential. And there is a wall of these floating rate loan maturities barreling down right now ramping up significantly in 2024, increasing each year for the next five years. 2023 was just like a prelude, folks. And guess who holds the paper on the bulk of these loans? Small regional banks, regionals like PNC Bank.

Now, it should go without saying that PNC is far and away a stronger business than almost all other regionals, which is why when I saw the news, I really couldn’t believe it. Realized six months ago, PNC was bidding. They were vying to acquire First Republic after it failed. It was them and JP Morgan who were competing to buy the company, buying all their debt, being considered by the FDIC when all that went down.

Here’s what the Wall Street Journal said at the time. Big banks, including JP Morgan Chase and PNC Financial, submitted offers for the troubled lender earlier Sunday. So what the hell happened between then to now? Well, we’ll get to that in a minute. First, take a look at what Reuters reported on Friday saying PNC Financial reports drop in profit, begins job cuts. PNC Financial Services Group said on Friday, it’s cutting about 4% of its workforce and reported a drop in third quarter profit as a surge in funding costs offset higher interest from its assets. Also reporting weak results on loan syndication and merger and acquisition revenue. Well, good thing they didn’t merge and acquire First Republic because even a bank like PNC is clearly feeling the pain of the Fed’s jawboning.

I’ll show you in a minute what’s really behind this though, what’s really happening to them. And by the way, if it’s happening to them, you know, the other regional banks are doing just as bad, probably much worse. Here’s what Bloomberg reports. PNC says 4% workforce reduction will save $325 million in 2024. PNC Financial said it started reducing headcount by 4% as the bank navigates fallout from higher interest rates that have eaten away at profitability. Look, PNC is known as one of the best run banks in the country. Great management team over there, which could be why we’re seeing them do this before any of the others. This may be good management at work, good stewardship of the company, something that the other regional banks are just putting off, putting down the road, kicking the can down the road.

Here’s what they write. Personnel expenses will fall $325 million in 2024 as a result of the cuts, which began on October 6. The Pittsburgh based lender said in a earnings presentation Friday, but the move will result in a one time charge of $150 million during the first quarter of this year. That

This article is a summary of the YouTube video ‘Trouble at PNC Bank as Layoffs Start, Loan Activity Stalls (Bank Crisis 3.0)’ by RJ Talks