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The PNC Financial Services Group, Inc.’s (PNC - Analyst Report) first-quarter 2013 earnings per share of $1.76 significantly exceeded the Zacks Consensus Estimate of $1.57. Moreover, results beat the earnings per share of $1.44 recorded in the prior-year quarter.

Better-than-expected results reflected improved top line. Moreover, lower nonperforming assets, reduced operating expenses along with healthy capital levels were the positives. However, an increase in provision for credit losses and net charge-offs were the concerns.

Net income reported was $1.0 billion in the quarter under review, up from $811 million in the prior-year quarter.

Quarter in Detail

Total revenue was recorded at $4.0 billion, up 6% year over year. Higher net interest income and elevated non-interest income led to the rise. However, revenues were marginally below the Zacks Consensus Estimate.


Net interest income came in at $2.4 billion, increasing 4% year over year. Higher core net interest income from organic loan growth, reduced funding costs and the full quarter impact of the RBC Bank (USA) acquisition positively benefited the interest income. However, net interest margin decreased 9 basis points (bps) year over year to 3.81%.

Non-interest income surged 9% year over year to $1.6 billion. The upsurge reflected lower provision for residential mortgage repurchase obligations, elevated asset management, corporate and consumer services fees and higher other non-interest income. These positives were partially offset by reduced residential mortgage banking income.

Also, the company’s non-interest expense was $2.4 billion, down 2% from the prior-year quarter. The dip in expenses primarily reflected lower marketing and other expenses, partially offset by higher personnel, equipment and occupancy costs along with full-quarter operating expenses for the RBC Bank (USA) acquisition.

The company remains on track to reduce full-year 2013 non-interest expense from 2012 levels and realize $700 million in expense savings in 2013.

Credit Quality

Credit quality was mixed in the quarter at PNC Financial. Nonperforming assets decreased 10% year over year to $3.9 billion. Nonperforming assets to total assets were 1.31% as of Mar 31, 2013, down from 1.47% as of Mar 31, 2012.

Moreover, the allowance for loan and lease losses to total loans was 2.05% as of Mar 31, 2013, down from 2.38% in the prior-year quarter.

However, net charge-offs ascended 37% year over year to $456 million in the quarter, including charge-offs of $134 million mainly related to home equity and residential real estate loans to comply with the regulatory guidance.

PNC Financial’s provision for credit losses during the quarter was $236 million, up 28% year over year. This was mainly attributable to a larger loan portfolio.

Capital Position

PNC Financial’s capital ratios remained strong in the reported quarter. The positive impact from the growth in retained earnings was partly offset by higher risk-weighted assets from loan growth. Therefore, as of Mar 31, 2013, PNC Financial’s Tier 1 common capital ratio was estimated to be 9.8% up from 9.3% as of Mar 31, 2012.

Moreover, the Tier 1 risk-based capital ratio was projected to be 11.7% as of Mar 31, 2013, up from 11.4% as of Mar 31, 2012. The estimated pro forma Basel III Tier 1 common capital ratio was 7.9% as of Mar 31, 2013 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 2.5 rules.

As of Mar 31, 2013, total assets under administration were $236 billion, up 17% from the prior-year quarter. Total loans stood at $186.5 billion, up 6% year over year. Further, total deposits increased 3% year over year to $211.6 billion.

Capital Deployment Update

In Apr 2013, PNC Financial’s board of directors increased the quarterly cash dividend on common stock to 44 cents per share, reflecting an increase of 4 cents, or 10% over the prior dividend. The dividend will be paid on May 5, 2013, payable the next business day.

The increase in dividend follows the Federal Reserve’s approval of the company’s capital plan in Mar 2013. However, the share repurchase program for 2013 was not included in the capital plan due to the company's acquisition of RBC Bank (USA) and its expansion into the Southeastern markets.

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 earnings, excluding integration costs. Stress test clearance and dividend hikes were also positive catalysts.

Yet, a protracted economic recovery, continued low interest-rate environment and increased regulatory headwinds seem to limit the growth in profitability to some extent.

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

Among other major banks, Morgan Stanley (MS - Analyst Report) and Fifth Third Bancorp (FITB - Analyst Report) will report first-quarter 2013 results on Apr 18, while First Horizon National Corporation (FHN - Analyst Report) will report on Apr 19.

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