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PNC Financial Services Group Inc.’s ( PNC - Analyst Report ) first-quarter 2012 earnings per share came in at $1.67, substantially beating the Zacks Consensus Estimate of $1.45. Results also compared favorably with earnings of $1.43 per share in the prior quarter.
PNC Financial’s upbeat performance was attributed to improved revenue levels. Moreover, decreased non-interest expenses reflect better expense management. Contraction in the provision for credit losses was also on the upside. Yet, the company incurred a couple of one-time charges in the quarter and nonperforming assets also increased.
Notably, PNC Financial’s first quarter 2012 earnings, including 5 cents per share (after tax) impact from residential mortgage foreclosure-related expenses and 18 cents per share for integration costs, stood at $1.44 per share.
Quarter in Detail
Total revenue for the quarter came in at $3.7 billion, up 5% sequentially. Moreover, it also slivered past the Zacks Consensus Estimate of $3.6 billion. The rise was primarily due to higher net interest income.
Net interest income for the reported quarter was $2.3 billion, up 4% sequentially. Loans from the RBC Bank (USA) acquisition, organic loan growth and lower funding costs were positives for the increased net interest income. Net interest margin climbed 4 basis points (bps) sequentially to 3.90%.
Non-interest income was up 7% sequentially to $1.4 billion. The sequential improvement was attributed to higher client fee income, partially offset by lower net gains on sales of securities.
Non-interest expense for the reported quarter came in at $2.5 billion, down 10% sequentially. Results were positively affected by lower personnel, occupancy, equipment and marketing expenses.
Credit quality was a mixed bag in the quarter. Nonperforming assets increased 6% sequentially to $4.4 billion in the quarter. The sequential increase was driven by an increase in home equity nonperforming loans, partially offset by lower commercial and commercial real estate nonperforming loans. Yet, the ratio of non-performing assets to total assets decreased 4 bps sequentially to 1.49%.
Net charge-offs climbed to $333 million, or 0.81% of average loans on an annualized basis, from $327 million, or 0.83%, in the prior quarter. Net charge-offs remained approximately stable as increased home equity and commercial real estate loan net charge-offs were largely offset by a fall in commercial loan net charge-offs.
The provision for credit losses during the quarter was $185 million, down 3% sequentially. Moreover, the allowance to nonperforming loans was 115% compared with 122% as of December 31, 2011.
As of March 31, 2012, PNC Financial’s Tier 1 common capital ratio was an estimated 9.3%, versus 10.3% as of December 31, 2011. The Tier 1 risk-based capital ratio was an estimated 11.4% as of March 31, 2012, compared with 12.6% in the prior quarter. The sequential declines in the Tier 1 common and Tier 1 risk-based capital ratios were due to higher risk-weighted assets and goodwill related to the RBC Bank (USA) acquisition.
As of March 31, 2012, total assets under administration were $219 billion, up from $210 billion in the prior quarter.
Capital Deployment Update
In April 2012, PNC Financial has announced a 14% hike in its quarterly dividend. The increased quarterly cash dividend now stands at 40 cents per share, up 5 cents from 35 cents paid earlier. The dividend will be paid on May 5, 2012 to shareholders of record as of the close of business April 17, 2012.
Moreover, the company plans to buyback up to $250 million of common stock under its existing 25 million share repurchase program. The shares will be purchased through open market or privately negotiated transactions through the rest of 2012.
Performance by peer
Among PNC Financial’s peers- JPMorgan Chase & Company ( JPM - Analyst Report ) reported first quarter earnings per share of $1.31, topping the Zacks Consensus Estimate of $1.17. This also compares favorably with $1.28 earned in the prior-year quarter.
JPMorgan’s better-than-expected earnings signals good going by the sector as it has exposure in almost all banking businesses. Marked recovery of the bond and equity market and consequent revenue growth, which helped JPMorgan to bounce back, should lift the results of other mega-banks during the quarter.
PNC Financial's continued strengthening of balance sheet, with focus on risk and expense management, should propel its earnings ahead. Moreover, top-line growth reflected the company’s strength. Lately, the company completed the purchase of RBC Bank (USA), the U.S. retail banking subsidiary of Royal Bank of Canada ( RY - Snapshot Report ) . The acquisition was accretive to reported quarter earnings, excluding integration costs.
The acquisition facilitated PNC Financial to expand its footprint in the Southeast markets by adding over 400 branches to its network. It marked PNC Financial's seventh successful acquisition in the past eight years. However, increase in nonperforming assets and the regulatory issues remain a concern.
An investor with an appetite to absorb risks related to the market volatility should not be disappointed with investments in PNC Financial over the long haul. PNC Financial’s fundamentals remain highly promising with a diverse business model and a strong balance sheet.
Also, from the risk perspective, as PNC Financial cleared the most difficult stress test, it is for sure that PNC Financial would be able to withstand another financial crisis.
Moreover, one can consider a company like PNC Financial as value investment due to its steady dividend-yielding nature. The company announced a 14% increase in its quarterly dividend to 40 cents per share. Prior to this, the company had increased its quarterly dividend significantly to 35 cents from 10 cents in April 2011.
The redemption of TruPS by PNC Financial also followed the green signal from the Federal Reserve for the company’s capital actions. By redeeming TruPS PNC Financial was being able to lower the interest costs, as these securities demand higher rates compared to others.
PNC Financial shares maintain a Zacks #3 Rank, which translates into a short-term ‘Hold’ recommendation. Considering the fundamentals, we also maintain our long-term “Neutral” rating on the stock.
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