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PNC Financial Beats Estimates

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PNC Financial Services Group Inc.’s (PNC - Free Report) third quarter 2012 adjusted earnings per share of $1.68 exceeded the Zacks Consensus Estimate of $1.61. However, results were below the earnings per share of $1.74 recorded in the prior quarter.

Earnings excluded 17 cents per share of after tax gain on the sale of 5 million Visa, Inc. (V - Free Report) shares. Moreover, negative impacts from the provision for residential mortgage loan repurchase obligations, redemption of trust preferred securities and integration costs reduced earnings per share by 5 cents, 12 cents and 4 cents, respectively.

Considering these non-recurring items, the company reported net income of $925.0 million or $1.64 per share in the quarter under review. Also, considering the impact of the comparable items (barring the after-tax gain), earnings came in at $546.0 million or 98 cents per share in the prior quarter.

Quarter in Detail

Total revenue was recorded at $4.1 billion, up 12.8% sequentially. Moreover, revenue marginally beat the Zacks Consensus Estimate of $4.0 billion. Although the company experienced a solid growth in non-interest income as well as in consumer and corporate client fee income, the positives were offset by the provision for residential mortgage repurchase obligations.

Net interest income came in at $2.4 billion, down 4.0% sequentially. Moreover, net interest margin declined 26 basis points (bps) sequentially to 3.82%. Both the declines were mainly due to lower purchase accounting accretion.

However, non-interest income increased 54.5% sequentially to $1.7 billion. The hike reflected lower provision for residential mortgage repurchase obligations along with a gain on sale of a part of PNC's investment in Visa shares.

Also, the company’s non-interest expense was $2.6 billion, unchanged from the last quarter. Hike in personnel costs were offset by decline in non-cash charges for unamortized discounts due to redemption of trust preferred securities and lower integration expenses.

Credit Quality

Credit quality was mixed in the quarter at PNC Financial. Nonperforming assets decreased 3.7% sequentially to $4.0 billion, mainly due to declines in commercial real estate nonperforming loans and other real estate owned, partially offset by hike in home equity and residential mortgage nonperforming loans. Nonperforming assets to total assets were 1.34% as of September 30, 2012, down from 1.39% as of June 30, 2012 and 1.59% as of September 30, 2011.

Net charge-offs increased 5% sequentially to $331 million in the quarter. Net charge-offs for the reported quarter came at 0.73% of average loans on an annualized basis, up from 0.71% reported in the prior quarter but down from 0.95% in the year-ago quarter

PNC Financial’s provision for credit losses during the quarter was $228 million, down 10.9% sequentially.

Capital Position

PNC Financial’s capital ratios remained strong in the reported quarter. The positive impact from the growth in retained earnings offset the higher risk-weighted assets from loan growth. Therefore, as of September 30, 2012, PNC Financial’s Tier 1 common capital ratio was estimated to be 9.5% compared with 9.3% as of June 30, 2012.

Moreover, the Tier 1 risk-based capital ratio was projected to be 11.7% as of September 30, 2012 compared with 11.4% as of June 30, 2012. The surge in the Tier 1 risk-based capital ratio reflected the issuance of $450 million of 5.375% preferred stock by the company.

As of September 30, 2012, total assets under administration were $222 billion, up 3.7% 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 third quarter, the company bought back shares worth $85 million under this share buyback authorization.

Our Viewpoint

We believe 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) is expected to be accretive to its 2012 earnings, excluding integration costs. Stress test clearance, dividend hikes and share buybacks also serve as 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 #2 Rank, which translates into a short-term Buy recommendation.

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