Fitch: PNC's 1Q'14 Earnings Solid Despite Revenue Challenges

CHICAGO--()--PNC Financial Services Group, Inc. (PNC) reported a solid 1.35% return on asset (ROA) during the first quarter of 2014 (1Q'14), supported by lower expenses and credit costs, offset by lower repurchase reserve releases and seasonality in fee income, according to Fitch Ratings. Fitch views these results as consistent with PNC's credit profile, with ratings that remain among some of the highest in the world.

Similar to other banks reporting to date, spread income declined during the quarter, reflecting two fewer days and lower purchase accounting accretion (PAA). PNC reported a sizeable 12 basis points (bps) decline in the net interest margin (NIM) due to lower asset yields and less PAA. PNC expects that net interest income will be down modestly in 2Q'14 relative to this quarter.

Excluding the impact of purchase accounting accretion on the NIM, PNC's core NIM declined 8 bps a linked-quarter basis to 3.02%, below the average for the large regional banks. Although PNC's margin continues to compress, PNC loan growth is solid and the company has good revenue diversity, with noninterest income comprising 42% of revenues during the quarter, insulating the company somewhat from a very challenging interest rate environment.

Noninterest income declined 12% on a linked-quarter basis mainly reflecting a much lower mortgage repurchase reserve release and seasonal declines in fee income. This was partially offset by a $62 million pre-tax gain on the sale of Visa shares.

PNC reported a sizeable 10% decrease in noninterest expenses from a continued focus on expense management, as well as lower compensation costs, pension and benefit costs. Last quarter's expenses also included a $50 million contribution to PNC Foundation, and higher legal accruals, including the previously disclosed residential mortgage fair lending joint settlement with the CFPB and DOJ. This fine related to legacy National City Bank activities.

Credit quality continues to improve for PNC, and the company reported still low net charge-offs (NCOs) of just 38 bps during 1Q'14. PNC's NCOs can be a bit lumpy from quarter-to-quarter, ranging from 38 bps this quarter to 99 bps in 1Q'13. Reported nonaccrual assets also declined 5% on a sequential basis. Quarterly earnings benefitted from a loan loss reserve release with NCOs exceeding provision expenses, though at only 6% of pre-tax income, it is not considered to be a driver of quarterly earnings.

PNC continued to enhance its liquidity position in anticipation of new regulatory requirements, namely the October 2013 Liquidity Coverage Ratio (LCR) proposal. PNC has not publicly disclosed its estimate of the LCR, though the loan to deposit ratio is 89% at March 31, 2014. While Fitch expects this ratio could rise as loan growth resumes to more normalized levels, Fitch expects PNC will manage its liquidity position in a conservative manner, as it has historically done so.

PNC also reported a further increase in its estimated fully phased-in Tier 1 common ratio (CET1) under Basel III, up 30 bps to an estimated 9.7% CET1 ratio at March 31, 2014. PNC attributed the increase to growth in retained earnings and higher AOCI, partially offset by higher risk-weighted assets. PNC received no objection to its capital plan under CCAR, and performed well under the regulatory stress testing relative to other large regional banks, with a minimum tier 1 common ratio of 8.1% after proposed capital plans, which is a very strong ratio in light of the onerous stress test.

Additional information is available at www.fitchratings.com.

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Contacts

Fitch Ratings
Julie Solar
Senior Director
+1-312-368-5472
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
or
Justin Fuller
Director
+1-212-908-2057
or
Media Relations:
Brian Bertsch, +1-212-908-0549 (New York
brian.bertsch@fitchratings.com

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Contacts

Fitch Ratings
Julie Solar
Senior Director
+1-312-368-5472
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
or
Justin Fuller
Director
+1-212-908-2057
or
Media Relations:
Brian Bertsch, +1-212-908-0549 (New York
brian.bertsch@fitchratings.com