Fitch: PNC's 3Q'14 Earnings in Line with Expectations

CHICAGO--()--PNC Financial Services Group, Inc. (PNC) reported a solid 1.25% return on asset (ROA) during the third quarter of 2014 (3Q'14), supported by solid fee income growth and lower credit costs, partially offset by a continued decline in spread income. Fitch Ratings views the quarter's results as consistent with PNC's credit profile, with ratings that remain among some of the highest in the world. PNC's ratings were recently affirmed at 'A+' during the Oct. 7, 2014 large regional bank periodic review.

Reflecting a still uneven economic recovery and a competitive lending environment, average loans were flat from the prior quarter. Some of the decline in spread income was attributed to a higher liquidity position as PNC increased total borrowings in preparation for the phase-in requirements of the LCR. PNC disclosed that it would be well above the 80% minimum on Jan. 1, 2015.

Excluding the impact of purchase accounting accretion on the net interest margin (NIM), PNC's core NIM declined 14 basis points (bps) on a linked-quarter basis to 2.78%, well below the average for the large regional banks. Most of the decline was attributed to increased balances at the Federal Reserve. Although PNC's margin continues to compress and remains below peer levels, PNC has good revenue diversity, with noninterest income comprising 45% of revenues, insulating the company somewhat from a very challenging interest rate environment.

Noninterest income increased 3% on a linked-quarter basis mainly reflecting fee income growth, from higher asset management revenue, corporate service fees, and deposit service charges. PNC reported additional gains on the sale of VISA shares in 3Q'14, with $57 million in securities gains this quarter, up slightly from $54 million last quarter. PNC has indicated that it intends to continue to monetize its ownership of VISA shares, and as quarter-end 2014, still has approximately $560 million of unrealized gains.

PNC reported relatively flat noninterest expenses, and has already met its full-year 2014 savings goal of $500 million in expense savings. PNC expects that expenses may be up low single digits in 4Q'14 relative to 3Q'14.

Credit quality continues to improve for PNC, and the company reported very low net charge-offs (NCOs) of only 16 bps during 3Q'14, an unsustainably low level for the company and supported by net commercial loan recoveries. Reflecting the continued improvement in credit quality, provision expense declined 24% during the quarter. New non-performing loan (NPL) inflows fell to just $380 million during the quarter, well below the amount a year ago or last quarter. Reserves at 1.7% of loan losses will likely remain above the large regional bank peer average.

PNC also reported a further increase in its estimated fully phased-in Tier 1 common ratio (CET1) under Basel III standardized approach rules, up 10bps to an estimated 10.1% CET1 ratio at Sept. 30, 2014. The increase was due to growth in retained earnings, partially offset by share repurchases.

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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
brian.bertsch@fitchratings.com

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
brian.bertsch@fitchratings.com