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PNC Financial Beats Estimates

PNC V BK

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PNC Financial Services Group Inc.’s (PNC - Analyst Report) fourth quarter 2012 adjusted earnings per share of $1.71 significantly exceeded the Zacks Consensus Estimate of $1.37. However, results were below the earnings per share of $1.74 recorded in the prior quarter.

Considering the impact of certain actions taken in the fourth quarter, associated with the residential mortgage banking activities and other items, the company reported net income of $664.0 million or $1.24 per share in the quarter under review. Also, considering the impact of certain non-recurring items, earnings came in at $876.0 million or $1.64 per share in the prior quarter.
 
Better-than-expected results reflected improved net interest income. Moreover, lower nonperforming assets, reduced charge-offs along with healthy capital levels were the positives. However, a decline in the non interest income and an increase in provision for credit losses were the concerns.
 
For full year 2012, PNC Financial reported net income of $2.8 billion or $5.30 per share, down from net income of $3.0 billion or $5.64 per share. Results also fell short of the Zacks Consensus Estimate of $5.48 per share.
 
Quarter in Detail
 
Total revenue was recorded at $4.1 billion, almost stable sequentially. Moreover, revenue marginally beat the Zacks Consensus Estimate of $3.9 billion. Also, exclusive of the impact of the provision for residential mortgage repurchase obligations and gains on sales of Visa Inc.’s (V - Analyst Report) shares in the fourth and third quarters of 2012, total revenue advanced 5% sequentially in the reported quarter.
 
Net interest income came in at $2.4 billion, increasing 1% sequentially. Core net interest income remained stable as loan growth was offset by the impact of lower core yields on interest earning assets. Moreover, net interest margin increased 3 basis points (bps) sequentially to 3.85%. 
 
However, non-interest income declined 3% sequentially to $1.6 billion. The decline reflected higher provision for residential mortgage repurchase obligations along with a reduced residential mortgage banking income.
 
Also, the company’s non-interest expense was $2.8 billion, up 7% from the last quarter. The hike reflected increase in personnel costs along with increased expenses for residential mortgage foreclosure-related matters. These were partially offset by lower non-cash charges for unamortized discounts related to the redemption of trust preferred securities. 
 
Credit Quality
 
Credit quality was mixed in the quarter at PNC Financial. Nonperforming assets decreased 6% sequentially to $3.8 billion, mainly due to decreases in commercial real estate and commercial nonperforming loans partly offset by increases in consumer lending nonperforming loans. Nonperforming assets to total assets were 1.24% as of Dec 31, 2012, down from 1.34% as of Sep 30, 2012 and 1.53% as of Dec 31, 2011.
 
Net charge-offs declined 6% sequentially to $310 million in the quarter. Net charge-offs for the reported quarter came at 0.67% of average loans on an annualized basis, down from 0.73% reported in the prior quarter and from 0.83% in the year-ago quarter.
 
PNC Financial’s provision for credit losses during the quarter was $318 million, up 39% sequentially. This was mainly attributable to a larger loan portfolio and reduced reserve release in commercial lending.
 
Capital Position
 
PNC Financial’s capital ratios remained strong in the reported quarter. The positive impact from the growth in retained earnings more than offset the higher risk-weighted assets from loan growth. Therefore, as of Dec 31, 2012, PNC Financial’s Tier 1 common capital ratio was estimated to be 9.6% up from 9.5% as of Sep 30, 2012.
 
Moreover, the Tier 1 risk-based capital ratio was projected to be 11.7% as of Dec 31, 2012, unchanged as of Sep 30, 2012. The estimated pro forma Basel III Tier 1 common capital ratio was 7.3% as of Dec 31, 2012 without benefit of phase-ins, based on current understanding of Basel III proposed rules, estimates of Basel II (with proposed modifications) risk-weighted assets and application of Basel II.5 rules.
 
As of Dec 31, 2012, total assets under administration were $224 billion, up 1% from the previous quarter.
 
Capital Deployment Update
 
In April 2012, the company announced plans to buyback up to $250 million of common stock under its existing 25 million share repurchase program through the rest of 2012. During the fourth quarter, the company bought back shares worth $55 million under this share buyback authorization. During 2012, the company bought back shares worth $190 million.
 
Peer Performance
 
Among PNC Financial’s peers, The Bank of New York Mellon Corporation’s (BK - Analyst Report) reported its fourth-quarter 2012 earnings of 53 cents per share, which was line with the Zacks Consensus Estimate. However, it compared unfavorably with prior quarter’s earnings of 61 cents.
 
Lower top line and higher operating expenses adversely impacted the results in the quarter. Yet, asset quality continued to show improvements and capital ratios remained healthy. 
 
Our Viewpoint
 
We believe that PNC Financial is well positioned to grow given its diverse revenue mix, balance sheet strengthening efforts, strategic acquisitions and solid capital levels. Moreover, the company’s acquisition of RBC Bank (USA) was accretive to its 2012 earnings, excluding the integration costs. Stress test clearance, dividend hikes and share buybacks were also the positive catalysts.
 
Yet, a protracted economic recovery, continued low interest rate environment, increased regulatory headwinds as well as elevated mortgage repurchase costs seem to limit the growth in profitability to some extent.
 
PNC Financial shares maintain a Zacks Rank #3 (Hold).

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