PNC PNC Financial Services Group Inc

By Allison Prang

Regional bank leaders on Wednesday talked up the strength of the economy, even though the spread between long-term and short-term lending has gotten smaller, a move that could lead the market to worry the economy isn't far off from a recession.

From the end of the third quarter through mid-January, the yield curve spread -- or the difference between 2-year and 10-year Treasury yields -- has narrowed, compressing from about 24 basis points at the end of September to about 18 basis points on Tuesday, according to Dow Jones Market Data. During that more than three-month period, the difference between the two yields hit a low in mid-December at about 11 basis points.

Investors watch the yield curve closely as a gauge of the profitability of their lending businesses. When the gap narrows, it can erode the margins from borrowing at low short-term rates and lending and higher long-term rates. An inversion of the yield curve -- or when short-term rates are higher than long-term rates -- has happened before every recession since at least 1975, according to Dow Jones Market Data.

Even so, some of the country's largest regional banks aren't that worried, even as financial stocks have taken a hit in recent months along with the wider stock market.

U.S. Bancorp Chief Financial Officer Terry Dolan said in an interview Wednesday that people tend to watch the yield curve as the biggest indicator of when a recession is coming, but cautioned that an inverted yield curve is one of a number of things that would have to happen for the economy to turn. Those other factors -- like less business spending or early consumer credit delinquencies -- haven't happened.

"We see the yield curve and not really anything else," Mr. Dolan said.

In PNC Financial Services Group Inc.'s fourth-quarter earnings call on Wednesday, Chief Executive Bill Demchak noted the yield curve's movements, but said PNC's corporate customers are "largely bullish" still and that economic data from the Institute of Supply Management measuring business activity shows expansion, even while being off from its highs.

"We don't think we're headed towards a recession," Mr. Demchak told analysts. "Consumer confidence remains high and it's going to provide support for consumer spending."

He still cautioned that if the government shutdown continued for a while or trade issues with China continue, the situation could change, but added PNC didn't think that would happen.

"Instead, we see an economy growing at over 2.5% and healthy loan demand as the repricing of the risk in the capital markets drives business back to the banks," he said.

In reporting their fourth-quarter earnings results Wednesday, both firms reported increases in their provisions for credit losses from the comparable quarter a year ago. U.S. Bancorp's rose 9.9% to $368 million and PNC's rose 18% to $148 million.

Mr. Dolan said the firm feels "really good" about credit quality. The company's net charge-offs will increase seasonally in the first part of 2019 but start to fall after that, he said.

Mr. Demchak said that PNC had four commercial loans change to nonperforming assets during the quarter, but they were "associated with strange things" and "nothing kind of based on the broader economy." Chief Financial Officer Robert Reilly also said the increase in the provision was partly because of loan growth.

"We don't see anything," Mr. Demchak said. "It just can't stay ... that low forever."

Write to Allison Prang at allison.prang@wsj.com

(END) Dow Jones Newswires

January 16, 2019 16:10 ET (21:10 GMT)

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