CHICAGO--(BUSINESS WIRE)--PNC Financial Services Group, Inc. (PNC) reported $1 billion in net income, up 4% on a linked-quarter basis, according to Fitch Ratings. Results were favorably impacted by strong fee income growth, low credit costs, and controlled expenses. Given the low rate environment, the margin continues to compress, while loan balances were essentially flat.
The quarter's results also benefitted from an unusually large $30 million trust settlement in PNC's Asset Management Group, which typically run more in the range of low single-digit millions.
Excluding the impact of purchase accounting accretion (PAA) on the net interest margin (NIM), PNC's core NIM declined 6 basis points (bps) on a linked-quarter basis to 2.59%, well below the average for the large regional banks. PNC now expects that full-year PAA will be $200 million lower in 2015, as compared to 2014. PAA contributed $583 million to spread income last year or approximately 7% of net interest income.
Although PNC's margin continues to compress and remains below peer levels, PNC has good revenue diversity, with noninterest income comprising a healthy 47% of reported revenues in the second quarter of 2015 (2Q'15), insulating the company from the impacts of the low interest rate environment on bank margins.
Noninterest income increased a strong 9% on a linked-quarter basis, aided by higher fee income, from higher client activity and seasonality. PNC also reported gains of $79 million on the sale of its Visa shares in 2Q'15, up from nothing last quarter. Gains on the sale of the company's Visa shares have averaged over $50 million a quarter, or around 3% of quarterly pre-tax income. As of March 31, 2015, the unrealized gain on PNC's Visa shares totaled $663 million, providing the company with the opportunity to likely sell down its holdings, and realize further gains.
Noninterest expenses increased 1% on a linked-quarter basis due primarily to higher variable compensation costs, increased technology expenses, which were offset by lower charges related to historic tax credits (previously reported in the tax line). For the full-year, PNC expects noninterest expenses to be 1% lower than last year. PNC has consolidated 50 branches year-to-date, with a further 50 to go. However, there will not be large one-time expenses related to further branch closures and consolidations.
PNC reported negligible period-end loan growth, with increases in specialty C&I, CRE and leasing financing offset by continued shrinkage in home equity and education loans. Despite modest loan growth trends, Fitch views this as prudent given the very competitive lending environment.
PNC discussed that the company has not reported growth in the hotly contested middle-market C&I lending space, as they define for themselves as companies with revenues between roughly $50 million to $1 billion. PNC has sought to purposely shrink loan only relationships over the past several years both for profitability and regulatory reasons.
PNC's duration of equity remains negative, and the balance sheet remains asset sensitive. While balance sheet positioning constrains NII growth in the short term, the company feels it is well positioned for rate rises in the future. PNC expects the Federal Reserve to raise the Fed Funds rate in September, and the company expects pressure on pricing of retail deposits given new regulatory liquidity rules that places more value on retail deposits than wholesale deposits.
The credit environment remains quite benign, and net charge-offs (NCOs) decreased again, to only 13bps in 2Q'15, due to strong recoveries in commercial lending. Fitch notes that NCOs at this level are likely unsustainable for the company and the industry. PNC has indicated in the past that its through the cycle loss expectations are between 50bps and 60bps.
PNC exposure to the energy sector is very manageable. At June 30, 2015, PNC reported $2.6 billion of oil and gas outstandings, which were down 10% from last quarter. This represents less than 2% of total loans.
PNC reported its estimated fully phased-in Common Equity Tier 1 ratio (CET1) under Basel III standardized approach rules was 10%, unchanged from the prior quarter. PNC also disclosed that its estimated pro forma Liquidity Coverage Ratio was in excess of 100% at both the consolidated and bank levels at quarter-end. This more than exceeds the minimum phased-in requirement of 80%, which became effective for Advanced Approach banks on Jan. 1, 2015.
Lastly, PNC also announced that the OCC mortgage servicing consent order was terminated during the quarter, while some of PNC's peers were deemed to not have met all the requirements yet.
Additional information is available at 'www.fitchratings.com'.
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.