O'Brien's Goal in the '90S: Make PNC 100% Fat-Free

By Klinkerman, Steve | American Banker, May 5, 1992 | Go to article overview
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O'Brien's Goal in the '90S: Make PNC 100% Fat-Free

Klinkerman, Steve, American Banker

O'Brien's Goal in the '90s: Make PNC 100% Fat-Free

PITTSBURGH -- When it comes to rigorous efficiency, Thomas H. O'Brien should be one proud chief executive. After all, his PNC Financial Corp. last year had the seventh-lowest operating costs among the nation's 50 largest banking companies.

But Mr. O'Brien says that's not good enough. PNC's chairman and CEO wants to drive the company's ratio of recurring expenses to net revenues below 50% from an already-low 59.5%.

Even Banc One Corp., the perennial leader of operating efficiency, has yet to achieve that; the Columbus, Ohio-based company last year managed a 56.51% ratio, according to calculations by Keefe, Bruyette & Woods.

U.S. banks controlling more than $25 billion of assets in 1991 together posted a 66% ratio.

"We'll have to be a very lowcost producer to be a superior performer," Mr. O'Brien insisted.

If PNC, with $43.8 billion in assets, achieves its efficiency target, the Pittsburgh-based company "would set a new benchmark for the banking industry," said Anthony Davis, a banking analyst with Wheat First Butcher & Singer, Richmond, Va.

Recovering from a Crash

The efficiency crusade is a veritable path to redemption for Mr. O'Brien, who is 55. He charged to the forefront of the banking industry during the heady 1980s, doubling PNC in less than five years.

But the executive crashed into a brick wall in late 1990, presiding over a $168.3 million fourth-quarter loss provoked by realty loan defaults.

Once jolted, Mr. O'Brien rebuilt his strategy from the ground up. He started gearing up for the contractionary 1990s, forsaking bold expansion and embracing intense fiscal discipline as his credo.

Just how far has Mr. O'Brien gone? He has sunk $5.5 million into a computer system that tracks each of PNC's 490 branches and 107 banking products.

The system manages nearly three million sets of records, generates roughly 500 cost-allocation statistics using 25,000 criteria, and pops out a company-wide analysis within eight business days after each monthly reporting period.

"We saw that if you can't measure it, you can't manage it," says William J. Johns, senior vice president and controller at PNC.

System Broadly Useful

By reining in personnel expenses and using the system to pinpoint cost-cutting opportunities, Mr. O'Brien hopes to raise returns even at units showing slow revenue growth - simply by holding the rate of expense growth even lower.

Streamlining is but one offshoot of the project, however. Mr. O'Brien also is using computer analysis to identify units whose profit margins are unalterably low - and putting them up for sale.

Computer-generated analysis led last year to the sale of four Ohio banks deemed unworkably distant from other hub operations in that state.

Also sold were a majority stake in a merchant-card processing unit in Louisville, Ky.; of a precious metals depository unit; and of a stock transfer unit.

Some Businesses Nurtured

At the same time, Mr. O'Brien bolstered investments in "high-potential businesses," such as mortgage banking, corporate services, mutual funds products, and a brokerage subsidiary.

These efforts mean everything to Mr. O'Brien, who only too well remembers the dark days of 1990. after a decade of acquiring rivals and pumping out loans at a breath-taking clip, PNC rather suddenly began unraveling.

In 1990 alone, nonperforming assets leaped by 124.4% to $1.3 billion, or a daunting 4.67% of gross loans.

Not only did PNC's common stock sink to $16 per share - a 45% discount from book value - but analysts were fairly open in saying Mr. O'Brien got what he deserved.

"Management was slow to come to grips with the deterioration in the loan portfolio, and doubly slow to communicate [with] Wall Street," commented Brown Brothers Harriman & Co.

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