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The PNC Financial Services Group, Inc.’s (PNC - Analyst Report) second-quarter 2013 earnings per share of $1.99 outpaced the Zacks Consensus Estimate of $1.64. Moreover, this compared favorably with 98 cents earned in the prior-year quarter.

Better-than-expected results were driven primarily by growth in non-interest income and a decline in operating expenses, partly offset by a fall in net interest income. Further, enhanced credit quality was the positives, while capital ratios were a mixed bag.

Net income reported was $1.1 billion in the said quarter, up from $546 million in the prior-year quarter.

Quarter in Detail

Total revenue came in at $4.1 billion, up 12.2% year over year. The growth was primarily driven by a rise in non-interest income, partly mitigated by lower net interest income. Additionally, total revenue beat the Zacks Consensus Estimate of $3.9 billion.

Net interest income was $2.3 billion, decreasing 10.6% year over year. The fall was mainly due to a decrease in loan and securities yield as well as purchase accounting accretion. However, these negatives were partly offset by a lower interest rate on the borrowed funds. Moreover, net interest margin (NIM) decreased 5 basis points (bps) year over year to 3.58%.

Non-interest income surged 64.6% year over year to $1.8 billion. The rise largely reflected an increase in client fee income as well as asset sales and valuation and lower provision for residential mortgage repurchase obligations.

Additionally, the company’s non-interest expense was $2.4 billion, down 8.0% from the prior-year quarter. The fall was primarily attributable to a reduction in non-cash charges related to the redemption of trust-preferred securities, lower legal reserve, absence of integration cost and declining expenses related to residential mortgage foreclosure and other real estate owned costs.

Credit Quality

PNC Financial’s credit quality for the said quarter reflected significant improvement. Nonperforming assets fell 9.5% year over year to $3.8 billion. Nonperforming assets to total assets was 1.24% as of Jun 30, 2013, down 15 bps from the year-ago quarter.

Moreover, the allowance for loan and lease losses to total loans was 1.99% as of Jun 30, 2013, decreasing 31 bps from the prior-year quarter. Net charge-offs fell 34.0% year over year to $208 million. Additionally, provision for credit losses was $157 million, down 38.7% year over year.

Capital Position

PNC Financial’s capital ratios depicted mixed results. As of Jun 30, 2013, the company’s Tier 1 common capital ratio was 10.1%, up from 9.3% as of Jun 30, 2012. This improvement was mainly boosted by growth in retained earnings. However, Tier 1 risk-based capital ratio was 12.0% as of Jun 30, 2013, down from 11.4% as of Jun 30, 2012.

The estimated pro forma Basel III Tier 1 common capital ratio was 8.2% as of Jun 30, 2013, compared with 8.0% as of Mar 31, 2013.

As of Jun 30, 2013, total assets under administration were $233 billion, up 8.9% from the prior-year quarter. Total loans were $189.8 billion, up 5.2% year over year. Further, total deposits increased 2.6% from the prior-year quarter to $212.3 billion.

Our Viewpoint

We believe that PNC Financial is well positioned to grow, given its diverse revenue mix, balance sheet strengthening efforts, improving credit quality, strategic acquisitions and steady capital levels. However, a protracted economic recovery, persistent low interest-rate environment and increased regulatory headwinds are likely to impede growth in profitability.

PNC Financial currently carries a Zacks Rank #3 (Hold).

Among other major banks, Morgan Stanley (MS - Analyst Report) and Fifth Third Bancorp (FITB - Analyst Report) will report results on Jul 18, while First Horizon National Corporation (FHN - Analyst Report) will report on Jul 19.

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