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Fitch: PNC's 2Q'14 Earnings Remain Solid Despite Some Headwinds

CHICAGO--(BUSINESS WIRE)--PNC Financial Services Group, Inc. (PNC) reported a solid 1.31% return on asset (ROA) during the second quarter of 2014 (2Q'14), supported by strong fee income growth and lower credit costs, offset by higher expenses and a continued decline in spread income. Reflecting a still uneven economic recovery and a competitive lending environment, PNC grew loans only 1.4% on a linked-quarter basis, with commercial loan growth offset by continued deleveraging in certain consumer asset classes. Fitch still views the quarter's results as consistent with PNC's credit profile, with ratings that remain among some of the highest in the world.

Reflecting an ongoing trend, spread income declined during the quarter, reflecting lower loan yields and securities balances, and a reclassification of certain commercial facility fees as noninterest incomes. Excluding the reclassification of these fees, spread income was down 1.6% in 2Q'14. PNC also reported a sizeable 14 basis points (bps) decline in the net interest margin (NIM) due to lower asset yields and actions taken to improve liquidity, with 5 bps attributed to the reclassification of these fees.

Excluding the impact of purchase accounting accretion on the NIM, PNC's core NIM declined 10 bps a linked-quarter basis to 2.92%, below the average for the large regional banks. Although PNC's margin continues to compress and below peer levels, PNC has good revenue diversity, with noninterest income comprising 44% of revenues, insulating the company somewhat from a very challenging interest rate environment.

Noninterest income increased 6% on a linked-quarter basis mainly reflecting fee income growth, in part due to the commercial facility fees classification change. PNC reported additional gains on the sale of VISA shares in 2Q'14, with $54 million in securities gains this quarter, down slightly from $62 million last quarter. Excluding these items, core noninterest income was up 5% in 2Q'14 on a sequential basis.

PNC reported a 3% increase in noninterest expenses due to seasonally higher personnel expenses and incentive compensation costs, as well as increased marketing costs. PNC expects that expenses may be up low single digits in 3Q'14 relative to 2Q'14.

Credit quality continues to improve for PNC, and the company reported very low net charge-offs (NCOs) of just 29 bps during 2Q'14. Reflecting the continued improvement in credit quality, provision expense declined 23% during the quarter. Quarterly earnings once again benefitted from a loan loss reserve release with NCOs exceeding provision expenses, though at only 5% 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 continued to maintain higher deposit balances with the Federal Reserve, and higher borrowed funds balances. Borrowed funds have increased 23% from a year-ago, with most of the issuance completed at the bank-level. PNC has not publicly disclosed its estimate of the LCR.

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

Additional information is available at 'www.fitchratings.com'.

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