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The PNC Financial Services Group, Inc.’s (PNC - Analyst Report) third-quarter 2013 earnings per share of $1.79 outpaced the Zacks Consensus Estimate of $1.61. Moreover, this compared favorably with $1.64 earned in the prior-year quarter.

Better-than-expected results were primarily driven by decrease in both operating expenses and provision for credit losses. Further, enhanced credit quality and healthy capital ratios were the positives. However, a fall in revenues mainly due to lower net interest income as well as non-interest income is a plausible concern.

Net income reported was $1.0 billion in the said quarter, up 12% from $876 million in the prior-year quarter.

Quarter in Detail

Total revenue came in at $3.9 billion, down 4% year over year. The decline was mainly due to lower net interest income. However, total revenue was in line with the Zacks Consensus Estimate.


Net interest income (NII) was $2.2 billion, decreasing 7% year over year. The fall was mainly due to a decline in core net interest income from lower yields on loans and securities, partially offset by lower rates paid on borrowed funds and deposits. Moreover, a 19% decline in purchase accounting accretion from the prior-year period contributed to the fall in NII. Moreover, net interest margin (NIM) decreased 35 basis points (bps) year over year to 3.47%.

Non-interest income dropped 0.2% year over year to $1.7 billion. The marginal decline was mainly due to decrease in both residential mortgage banking revenues and other non-interest income, partly offset by rise in client fee income.

However, the company’s non-interest expense was $2.4 billion, down 9% from the prior-year quarter. The fall was primarily attributable to a reduction in non-cash charges related to redemptions of trust-preferred securities, along with other decreases that resulted from the impact of third-quarter 2012 integration costs. Additionally, a decline in expenses for residential mortgage foreclosure-related matters, other real estate owned matters and legal reserves led to the fall in expenses.

Credit Quality

PNC Financial’s credit quality for the said quarter reflected significant improvement. Nonperforming assets fell 10% year over year to $3.6 billion as overall credit quality improved. Nonperforming assets to total assets was 1.17% as of Sep 30, 2013, down 17 bps from the year-ago quarter.
Moreover, the allowance for loan and lease losses to total loans was 1.91% as of Sep 30, 2013, decreasing 31 bps from the prior-year quarter. Net charge-offs fell 32% year over year to $224 million. Additionally, provision for credit losses was $137 million, down 40% year over year.

Capital Position

PNC Financial’s capital ratios improved in the quarter. As of Sep 30, 2013, the company’s Tier 1 common capital ratio was 10.4%, up from 9.5% as of Sep 30, 2012. This improvement came on the back of growth in retained earnings. Further, Tier 1 risk-based capital ratio was 12.3% as of Sep 30, 2013, down from 11.7% as of Sep 30, 2012.

The estimated pro forma Basel III Tier 1 common capital ratio was 8.6% as of Sep 30, 2013, compared with 8.2% as of Jun 30, 2013.

As of Jun 30, 2013, total assets under administration were $237 billion, up 7% from the prior-year quarter. Total loans were $192.9 billion, up 6% year over year. Further, total deposits increased 5% from the prior-year quarter to $216.1 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 limit its profitability.

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

Among other major banks, Morgan Stanley (MS - Analyst Report) and First Horizon National Corporation (FHN - Analyst Report) will report results on Oct 18, while Fifth Third Bancorp (FITB - Analyst Report) will do so on Oct 17.

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