PNC Financial Services Group Inc.’s (PNC) second-quarter 2011 adjusted earnings of $1.67 per share were ahead of the Zacks Consensus Estimate of $1.47. Results also compared favorably with adjusted earnings of $1.47 per share in the prior-year quarter.
Consequently, reported net income increased 13.6% year over year to $912 million. A substantial contraction in the provision for credit losses, a strong balance sheet and improved credit quality were attributed to the results. However, revenues were lower as client fee income growth was offset by decline in other non-interest revenue sources. Moreover, increased non-interest expenses were the downside.
Total revenue came in at $3.60 billion, down 8% from $3.91 billion in the prior-year quarter, in line with the Zacks Consensus Estimate. The drop was due to lower net interest income as well as non-interest income.
Net interest income for the reported quarter was $2.15 billion, down 1.4% sequentially and 11.9% year over year. Net interest margin dipped 1 basis point sequentially and plummeted 42 basis points year over year to 3.93%. The decrease in net interest income and margin was attributed to lower purchase accounting accretion and low yield on earning assets driven by low interest rate environment.
Non-interest income was modestly in line sequentially but inched down 2.0% year over year to $1.45 billion. The decline could be attributed to lower service charges on deposits due to the impact of Regulation E rules pertaining to overdraft fees, which was partially offset by higher asset management fees.
Non-interest expense for the reported quarter inched up 5.3% sequentially and 9.0% year over year to $2.18 billion. The sequential increase was primarily due to a reversal of a portion of an indemnification liability for certain Visa Inc. litigation of $38 million in the reported quarter, legal charges associated with pending lawsuits as well as investments in the businesses. The year-over-year change resulted from the reversal of certain accrued liabilities.
Credit quality improved in the quarter. Non-performing assets decreased 22% year over year to $4.5 billion, mainly aided by lower commercial real estate non-performing loans and lower residential real estate non-performing loans. The ratio of non-performing assets to total assets decreased 49 basis points year over year to 1.70%.
Net charge-offs plunged $426 million year over year to $414 million in the reported quarter. The provision for credit losses during the quarter was $280 million, down 66% from $823 billion in the prior-year quarter, principally driven by overall credit quality improvement during the first half of 2011 and measures to reduce exposure levels. This reflects PNC Financial’s return to a moderate risk profile.
As of June 30, 2011, PNC Financial’s Tier 1 common capital ratio was an estimated 10.5%, up from 10.3% as of March 31, 2011 and 8.3% as of June 30, 2010. The Tier 1 risk-based capital ratio increased to an estimated 12.8% from 12.6% at the end of the prior quarter and 10.7% at the end of the prior-year quarter. The increase in the ratios was primarily due to retention of earnings.
Total assets under administration were $219 billion at the end of the reported quarter, in line with the prior quarter and $20 billion higher than the year-ago quarter.
Capital Deployment Update
The board of directors of PNC Financial declared a quarterly cash dividend on the company’s common stock of 35 cents per share payable on August 5, 2011.
PNC Financial did not repurchase shares in the first six months of 2011. The share repurchase program, which does not bear a termination date, has been in effect since October 4, 2007 and has 24.7 million shares remaining.
Peer Performance
Considering PNC Financial’s peer group, Bank of America Corporation’s (BAC) second-quarter 2011 loss of 90 cents per share was a penny narrower than the Zacks Consensus Estimate, and compares unfavorably with earnings of 27 cents in the prior-year quarter. BofA’s decision to settle its legacy Countrywide mortgage repurchase and servicing claims had a severe impact on second-quarter results. However, the negatives were partially offset by lower credit costs, gains from the sale of non-core assets and debt securities, improved sales and trading revenues, as well as higher asset management fees and investment banking fees.
Our Take
In June 2011, PNC Financial announced it was purchasing RBC Bank (USA), the U.S. retail banking subsidiary of Royal Bank of Canada, and have signed a definitive agreement in this context. The acquisition of this RBC banking business for $3.45 billion would help PNC Financial to expand its footprint in the Southeast markets. The purchase price of the RBC unit, which has approximately $25 billion of assets, represents a $112 million discount to tangible book value. The deal is expected to close in March 2012, subject to customary closing conditions including regulatory approvals. It is anticipated to be accretive to PNC Financial’s earnings by the end of 2013 or sooner depending on the purchase amount paid in stock.
The deal would create a win-win situation for PNC Financial. It would significantly widen the company’s operating footprint and double its presence in Florida, thereby creating opportunities for future growth.
As part of its effort to expand, PNC Financial also completed the acquisition of 19 branches from a subsidiary of BankAtlantic Bancorp Inc. Additionally, two related facilities in the Tampa – St. Petersburg area and associated deposits were also handed over to PNC Financial as part of the sale. The acquisition would establish the company’s retail banking footing in the Tampa Bay area. The company can also augment its other businesses by leveraging those branches.
Continued strengthening of the balance sheet, with a focus on risk and expense management, should propel its earnings ahead. Moreover, benefits from the 2008 National City acquisition continue to exceed the company's expectations. We also believe that the company’s latest acquisition spree would be accretive to its earnings. However, we expect the top line to remain restricted in the near term, with a continued soft demand for loans and a low interest rate environment. Regulatory initiatives also remain headwinds to both top and bottom lines.
PNC Financial currently retains its Zacks #3 rank, which translates into a short-term “Hold” rating. Moreover, considering the fundamentals, we maintain our long-term ‘Neutral’ recommendation on the stock.
BANK OF AMER CP (BAC): Free Stock Analysis Report
PNC FINL SVC CP (PNC): Free Stock Analysis Report
Get all Zacks Research Reports and be alerted to fast-breaking buy and sell opportunities every trading day.
Be the first to comment