The PNC Financial Services Group, Inc. PNC delivered an earnings surprise of 6.7% in third-quarter 2015. The company’s third-quarter earnings per share of $1.90 easily outpaced the Zacks Consensus Estimate of $1.78. Also, the reported figure compared favorably with $1.79 earned in the prior-year quarter.
Results were primarily driven by stable expenses, partially offset by decline in revenues and higher provisions. Also, loan and deposit balances exhibited growth.
The company reported net income of $1.07 billion in the reported quarter, up 3.4% year over year.
Furthermore, segment-wise, on a year-over-year basis, quarterly net income in Retail Banking and Other, including BlackRock segments increased 45% and 20%, respectively. However, net income of Corporate & Institutional Banking, Asset Management Group and Non-Strategic Assets Portfolio decreased 8%, 4% and 17%, respectively. The Residential Mortgage Banking segment reported a net loss of $4 million in the quarter compared to net income of $12 million in the prior-year quarter.
Quarter in Detail
Total revenue for the quarter came in at $3.78 billion, slightly below the Zacks Consensus Estimate of $3.79 billion. Compared to the prior-year quarter, total revenue declined 2% year over year, reflecting lower net interest income as well as non-interest income.
Net interest income was $2.06 billion, down 2% year over year, as growth in core net interest income was more than offset by reduced purchase accounting accretion. Moreover, net interest margin decreased 31 basis points (bps) year over year to 2.67%.
Non-interest income declined marginally year over year to $1.71 billion. The decrease mainly reflected reduced income from asset management, residential mortgage and lower service charges on deposits. These decreases were partially offset by higher corporate service fees and consumer services fees.
However, on a positive note, non-interest expense of $2.35 billion remained almost stable from the prior-year quarter. Reduced expenses related to third party services and the impact of a change in application of historic tax credits in second-quarter 2015 were to some extent offset by investments in technology space and business infrastructure and increased compensation costs tied with higher business activity.
As of Sep 30, 2015, total loans were $205.0 billion, up 2% year over year, primarily reflecting growth in commercial lending. Further, total deposits increased 8% from the prior-year quarter to $245.0 billion. Total client assets decreased 1% year over year to $256 million.
Credit Quality
PNC Financial’s credit quality improved partially in the reported quarter. Allowance for loan and lease losses to total loans was 1.58% as of Sep 30, 2015, decreasing 12 bps from the prior-year quarter. Also, total nonperforming assets fell 16% year over year to $2.49 billion.
However, provision for credit losses increased 47% year over year to $81 million. Also, net charge-offs climbed 17% year over year to $96 million.
Capital Position
As of Sep 30, 2015, the transitional Basel III common equity Tier 1 capital ratio and Tier 1 risk-based capital ratio was 10.6% and 12.0%, as against 11.1% and 12.8 % as of Sep 30, 2014.
Share Repurchase
In third-quarter 2015, PNC Financial repurchased 6.2 million common shares for $0.6 billion. Notably, the company executed the share buyback according its share repurchase programs of up to $2.875 billion for the five-quarter period starting in the second-quarter of 2015.
Our Viewpoint
We remain optimistic as PNC Financial managed to improve profitability amid a challenging operating environment.
We believe that PNC Financial is well positioned to grow, given its diverse revenue mix, balance-sheet strengthening efforts, improving credit quality and steady capital levels. An increase in lending activities augurs well for the company. Moreover, PNC Financial’s capital deployment activities are impressive as the company continues to enhance shareholder value with its share buyback program and dividend payment.
However, the continued low interest-rate environment would continue to keep PNC Financial’s margins under pressure. The stock currently carries a Zacks Rank #3 (Hold).
Other Major Banks
Banking major JPMorgan Chase & Co. JPM kick-started the second-quarter earnings season. The New York City-based company missed on earnings. Adjusted EPS came in at $1.32 per share, missing the Zacks Consensus Estimate of $1.38 per share.
Among others, Citigroup Inc. C is slated to report results on Oct 15 and The Bank of New York Mellon Corporation BK is scheduled to report on Oct 20.
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