Cost Control Drives PNC Financial's Q1 Earnings

The PNC Financial Services Group, Inc.’s (PNC) reported a positive earnings surprise of almost 9.6%, which was primarily attributable to the company’s cost-containment measures. The company’s first-quarter 2014 earnings per share of $1.82 outpaced the Zacks Consensus Estimate of $1.66. Moreover, this compared favorably with $1.74 earned in the prior-year quarter.

Shares of PNC Financial increased around 1% in the pre-market session, indicating that investors have been bullish on the results. The price reaction during the trading session will give a fair idea whether PNC Financial has been able to meet market expectations.

Our proven model predicted that PNC Financial will post an earnings beat as it has the right combination of two key ingredients – positive Earnings ESP and a Zacks Rank #3 (Hold).

Better-than-expected results were primarily driven by 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 attributable to common shareholders of $992.0 million in the reported quarter, up 6.9% from the year-ago quarter.

Furthermore, segment-wise, on a year-over-year basis, quarterly net income in Retail Banking, Non-Strategic Assets Portfolio and Other, including BlackRock segments rose 31.7%, 39.2% and 41.3%, respectively, while Corporate & Institutional Banking and Asset Management Group segments reported a drop of 3.3% and 14.0%, respectively. However, the Residential Mortgage Banking segment recorded a net loss of $4 million as compared with net income of $45 million in the prior-year quarter.

Quarter in Detail

Total revenue came in at $3.8 billion, down 5% year over year. The fall was mainly due to lower net interest income. Total revenue was also below the Zacks Consensus Estimate of $3.9 billion.

Net interest income (NII.TO) was $2.2 billion, down 8.3% 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 loans and securities. Moreover, net interest margin (NIM) decreased 55 basis points year over year to 3.26%.

Non-interest income increased 1% year over year to $1.6 billion. The rise was mainly due to higher asset management revenues, corporate services fees and service charges on deposits. These positives were partially offset by lower residential mortgage banking revenue and reduced net gains on sales of securities.

PNC Financial’s non-interest expense was $2.3 billion, down 4% from the prior-year quarter. The fall reflected disciplined expense management with a decline in personnel expense for lower headcount and benefits costs and the impact of a first-quarter 2013 contribution to the PNC Foundation. These positives were partially offset by higher legal accruals related to the residential mortgage banking business and investments in technology.

Credit Quality

PNC Financial’s overall credit quality improved in the said quarter. Nonperforming assets fell 16% year over year to $3.3 billion due to improvement in commercial and consumer lending portfolios and other real estate owned and foreclosed assets. Nonperforming assets to total assets was 1.02% as of Mar 31, 2014, down 29 basis points from the year-ago quarter.

Moreover, the allowance for loan and lease losses to total loans was 1.78% as of Mar 31, 2014, decreasing 27 basis points from the prior-year quarter. Net charge-offs fell 59% year over year to $186 million. Additionally, provision for credit losses was $94 million, down 60% year over year.

Capital Position

During the quarter, PNC Financial’s capital plan was approved by the Federal Reserve under the 2014 Comprehensive Capital Analysis and Review (CCARF). The company’s 2014 plan included a request to increase its quarterly common stock dividend in the second quarter of 2014 and share buyback of up to $1.5 billion for the four quarter period beginning in the second quarter of 2014 under the company's existing common stock repurchase authorization.

Therefore, on the Fed’s approval, the board of directors of PNC Financial increased the cash dividend on common stock to 48 cents per share in April, up 9% from the prior dividend. The new dividend will be paid on May 5, 2014 to shareholders as of Apr 15.

PNC Financial’s capital ratios also improved in the quarter. As of Mar 31, 2014, the transitional Basel III common equity Tier 1 capital ratio was calculated using the regulatory capital methodology, effective for PNC Financial on Jan 1, 2014 with 2014 phase-ins, which came in at 10.8%.

This improvement came on the back of growth in retained earnings along with higher accumulated other comprehensive income, partially offset by elevated risk-weighted assets. Further, Tier 1 risk-based capital ratio was 12.5%, while leverage ratio was 11.1%.

As of Mar 31, 2014, total assets under administration were $255 billion, up 8.1% from the prior-year quarter. Total loans were $198.2 billion, up 6% year over year. Further, total deposits increased 5% from the prior-year quarter to $222.4 billion.

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, the company’s capital deployment activities are impressive.

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

Following a disappointing second-half 2013, Citigroup Inc. (C) reported impressive first-quarter 2014 results. Driven by prudent expense management, earnings per share came in at $1.30, outpacing the Zacks Consensus Estimate of $1.18. Moreover, earnings surpassed the prior-year period earnings by a penny.

Notably, results in the reported quarter were impacted by credit valuation adjustment (CVA) and debt valuation adjustment (DVA). Including CVA/DVA and the impact of tax charge associated with corporate tax reforms enacted in two states in the reported quarter, Citigroup reported net income of $3.9 billion or $1.23 per share compared with $3.8 billion or $1.23 per share in the prior-year quarter.

Among other major regional banks, Fifth Third Bancorp (FITB) is scheduled to report on Apr 17, while State Street Corp. (STT) will report on Apr 25.

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Read the Full Research Report on FITB
Read the Full Research Report on STT
Read the Full Research Report on C


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