Non-interest expense management can improve at PNC Bank

Non-interest expense means expenses other than interest payments on deposits and bonds. These are generally operational expenses and are essential to the day-to-day operation of a bank. These expenses include salaries and bonuses to staff, marketing, and equipment expenses.

A bank needs to prudently manage its operational expenses at an optimal level to maximize its profits. Poorly managed non-interest expenses directly impact the bottom line.

PNC Bank (PNC) has done a good job at managing non-interest expenses in the last few years. Net interest expenses stood at nearly $9.5 billion at the end of 2014, which was $193 million lower than 2013. This happened largely due to curtailing salary expenses and other miscellaneous expenses.

Both net interest income and non-interest income have increased in last three years. Despite this, the non-interest expenses have largely remained stagnant. However, there is still room for improvement in this measure for PNC Bank.

An indicator of controlling expenses is the bank’s efficiency ratio. Efficiency ratio is measured by dividing non-interest expenses by total income (sum of net-interest income and non-interest income). A lower ratio is considered better. PNC Bank has an efficiency ratio of nearly 62% for 2014. Generally, better quality banks keep this ratio below 60%.

Wells Fargo (WFC) Capital One (COF), and US Bank (USB), all peers of PNC Bank, keep this ratio lower than 60%. A few other banks in a broad financial fund such as the Financial Select Sector SPDR ETF (XLF) also have an efficiency ratio below 60%.

Keep in mind that an accounting standard update impacted this ratio in 2014. However, other banks already follow updated accounting conventions. So, for a like-for-like comparison, PNC Bank does not fare as well as its peers, and it can improve on this front in the years ahead.