(Adds Q4 guidance; updates shares)
Oct 12 (Reuters) - U.S. regional bank PNC Financial Services Group Inc on Friday reported disappointing quarterly loan growth and said it expected only a small improvement in lending for the final three months of the year, sending its shares down 5 percent.
The company's performance comes against the backdrop of heightened expectations for business borrowings as companies take advantage of lower taxes to boost investments.
However, PNC's loan growth rose a meager 2 percent in the third quarter, slower than the 4 percent increase it generated in the second quarter. The bank's loan growth was also well below JPMorgan Chase & Co's 6 percent rise and Citigroup's 4 percent.
"Investors want to see the benefits of tax reform and a strong economy materialize into loan growth at the banks. In that regard, we didn't see that happen for PNC this quarter," Edward Jones analyst Kyle Sanders said.
The bank said loan growth was likely to be up modestly, with increase in both its net interest income and fee income coming in low single digits.
Besides competition from bigger banks, regional lenders are also battling online lenders, asset managers and insurers for a piece of the lending business, Sanders said.
To counter the threat, the bank has been spending heavily to boost its online banking business, while trying to attract customers with reward schemes.
That drove a 6.2 percent jump in PNC's total non-interest expense, also pressured by higher employee wage bill.
A number of brokerages had previously said they were expecting roughly no change in the company's non-interest expenses.
Net interest income rose 2 percent to $2.4 billion, helped partly by higher interest rates, which allow banks to charge more on loans.
The Federal Reserve has raised rates four times since the third quarter last year, bringing the short-term overnight funds rate to 2.25 percent.
The bank's net interest margin, a key measure of lending profitability, also rose.
PNC's net income rose 26 percent to $1.32 billion in the quarter ended Sept. 30. Earnings per share came in at $2.82, compared with the average analyst estimate of $2.72 per share, according to I/B/E/S data from Refinitiv.
The regional bank's shares are down 9 percent this year. (Reporting by Diptendu Lahiri and Bharath Manjesh in Bengaluru, Writing by Anil D'Silva, Editing by Saumyadeb Chakrabarty)