The PNC Financial Services Group, Inc. (PNC) reported another impressive quarter with an earnings surprise of 4.7%, primarily attributable to the company’s cost-containment measures. The company’s third-quarter 2014 earnings per share of $1.79 outpaced the Zacks Consensus Estimate of $1.71. Moreover, this compared favorably with $1.77 earned in the prior-year quarter.
Better-than-expected results were primarily driven by a decrease in both non-interest expenses and provision for credit losses. Further, an enhanced credit quality and healthy capital ratios were the positives. However, lower top line was a concern.
The company reported net income of $1.04 billion in the reported quarter, up 1% from the year-ago quarter.
Furthermore, segment-wise, on a year-over-year basis, quarterly net income in Retail Banking, Corporate & Institutional Banking and Other, including BlackRock segments, rose 4.8%, 1.3% and 40.8%, respectively, while Non-Strategic Assets Portfolio, Residential Mortgage Banking and Asset Management Group segments reported a drop of 32.2%, 57.1% and 2.1%, respectively.
Quarter in Detail
Total revenue came in at $3.84 billion, down 2% year over year. The fall was mainly due to lower net interest income, partially offset by higher non-interest income. However, total revenue was above the Zacks Consensus Estimate of $3.78 billion.
Net interest income (NII) was $2.1 billion, down 6% year over year. The fall was mainly due to lower purchase accounting accretion and reduced core net interest income, which was primarily driven by a fall in yields on earning assets and lower balances of investment securities. Moreover, net interest margin (NIM) decreased 49 basis points year over year to 2.98%.
Non-interest income ascended 3% year over year to $1.7 billion. The upsurge was mainly due increased asset management revenue along with higher consumer and corporate service fees and service charges on deposits.
PNC Financial’s non-interest expense was $2.4 billion, down 2% from the prior-year quarter. The fall reflected prudent expense management with a decline in occupancy, marketing and other expenses. These positives were partially offset by increased costs in technology and infrastructure.
Credit Quality
PNC Financial’s overall credit quality improved in the said quarter. Nonperforming assets fell 18% year over year to $3 billion due to improvement in commercial real estate, commercial and consumer lending portfolios and other real estate owned. Nonperforming assets to total assets was 0.89% as of Sep 30, 2014, down 28 basis points from the year-ago quarter.
Moreover, the allowance for loan and lease losses to total loans was 1.70% as of Sep 30, 2014, decreasing 21 basis points from the prior-year quarter. Net charge-offs fell 63% year over year to $82 million. Additionally, provision for credit losses was $55 million, down 60% year over year.
Capital Position
PNC Financial’s capital ratios also improved in the quarter. As of Sep 30, 2014, the transitional Basel III common equity Tier 1 capital ratio was calculated using the regulatory capital methodology, effective for PNC Financial Jan 1, 2014 onwards with 2014 phase-ins, which came in at 11.1%. Further, Tier 1 risk-based capital ratio was 12.8%, while leverage ratio was 11.1%.
As of Sep 30, 2014, total assets under administration were $259 billion, up 9.3% from the prior-year quarter. Total loans were $200.9 billion, up 4% year over year. Further, total deposits increased 5% from the prior-year quarter to $226.3 billion.
Capital Deployment
In third-quarter 2014, PNC Financial repurchased 4.2 million common shares for $0.4 billion. Notably, the share buyback came under the company’s previously announced share repurchase program of up to $1.5 billion for the four-quarter period beginning second-quarter 2014 under its existing common stock repurchase authorization.
Our Viewpoint
We believe that PNC Financial is well positioned to grow, given its diverse revenue mix, expense control measures, balance sheet strengthening efforts, improving credit quality, strategic acquisitions and steady capital levels. An increase in lending activities augurs well for the company.
Moreover, PNC Financial’s capital deployment activities are impressive. Notably, the company increased its common stock quarterly dividend by 9% in April.
However, the top-line headwinds are expected to persist, given the protracted economic recovery. Also, a low interest-rate environment would keep PNC Financial’s margins under pressure. PNC Financial currently carries a Zacks Rank #3 (Hold).
Performance of other Major Banks
The third-quarter earnings season kick started with Wall Street biggies – Wells Fargo & Company (WFC), Citigroup Inc. (C) and JPMorgan Chase & Co. (JPM). Driven by top-line growth, Wells Fargo earned $1.02 per share in third-quarter 2014, thereby surpassing 99 cents earned in the year-ago quarter. However, the reported figure was in line with the Zacks Consensus Estimate.
JPMorgan came out with earnings of $1.62 per share, beating the Zacks Consensus Estimate of $1.39. The number also compares favorably with $1.42 earned in the year-ago quarter. Earnings exclude the impact of 26 cents per share related to the after-tax Firmwide legal expense. Considering this significant one-time item, the company has earned $1.36 per share.
Citigroup reported yet another impressive quarter. Adjusted earnings per share for third-quarter 2014 came in at $1.15, outpacing the Zacks Consensus Estimate of $1.12. Further, earnings compared favorably with the year-ago figure of $1.02 per share.
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