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PNC Financial (PNC) Q1 Earnings Down on Lower Fee Income

The PNC Financial Services Group, Inc. PNC which delivered positive earnings surprise in the trailing four quarters failed to keep the winning streak alive this time. The company’s first-quarter 2016 earnings per share of $1.68 missed the Zacks Consensus Estimate by a penny. Moreover, the bottom line declined 4% from the prior-year quarter.


Our quantitative model predicted that PNC Financial may not beat the Zacks Consensus Estimate in the first quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy) or at least #2 (Buy) or #3 (Hold) for this to happen. Though the company holds a Zacks Rank #3, it had an Earnings ESP of 0.00%.

Results were primarily affected by lower non-interest income due to weakness in equity markets and reduced capital markets activity. Also, the quarter recorded higher provisions. However, on a positive note, the company witnessed higher net interest income and lower expenses.

The company reported net income of $943 million in the reported quarter, down 6% year over year.

Segment -wise, on a year-over-year basis, quarterly net income in Corporate & Institutional Banking, Non-Strategic Assets Portfolio and Other, including BlackRock segments, declined 11%, 36% and 10%, respectively. Residential Mortgage Banking segment reported a net loss of $13 million in the reported quarter compared with a net income of $28 million in the prior year quarter.
 
However, net income in Retail Banking and Asset Management Group improved 33% and 32%, respectively.

Performance in Detail

Total revenue for the quarter came in at $3.67 billion, down 2% year over year. The fall was primarily led by a decline in non-interest income. Also, total revenue lagged the Zacks Consensus Estimate of $3.77 billion.

Net interest income inched up 1% year over year to $2.10 billion due to increase in core net interest income, partially offset by reduced scheduled purchase accounting accretion. However, net interest margin (NIM) decreased 7 basis points (bps) year over year to 2.75%.

Non-interest income dropped 6% year over year to $1.57 billion. Lower equity markets resulted in reduced revenues from asset management, while lower net hedging gains on commercial mortgage servicing rights along with lower capital markets activity affected corporate service fees. The quarter also witnessed fall in residential mortgage banking income.  The decreases were partially offset by higher fees from consumer services and service charges on deposits.

PNC Financial’s non-interest expense was $2.28 billion, down 3% year over year. The fall was mainly due to lower personnel, marketing and other expenses, partially offset by a rise in occupancy and equipment-related expenses.

As of Mar 31, 2016, total loans increased 1% to $207.5 billion; while total deposits increased 6% year over year to $250.4 billion.

Credit Quality

PNC Financial’s credit quality was a mixed bag in the said quarter.

Nonperforming assets fell 5% year over year to $2.28 billion. Ratio of nonperforming assets to total assets was 0.71% as of Mar 31, 2016, down 7 bps year over year. Moreover, the allowance for loan and lease losses to total loans was 1.31% as of Mar 31, 2016, decreasing 30 bps year over year.

However, net charge-offs increased 45% year over year to $149 million. Also, provision for credit losses was $152 million, significantly up from $54 million in the prior year quarter.

Capital Position

As of Mar 31, 2016, the transitional Basel III common equity Tier 1 capital ratio was 10.6%, up 1 basis point year over year. Tier 1 risk-based capital ratio was 11.9%, while leverage ratio was 10.2% as of the same date.

Share Repurchase

In first-quarter 2016, PNC Financial repurchased 5.9 million common shares for $0.5 billion.

Our Viewpoint

Undoubtedly, the latest results are a reflection of the challenging operating environment that the overall banking industry experienced in the first quarter. However, we believe that PNC Financial is well positioned to grow, given its diverse revenue mix, cost saving measures, improving credit quality, and strong capital levels.

An increase in lending activities augurs well for the company. Moreover, PNC Financial’s capital-deployment activities are impressive. Also, as the interest rates have finally started to rise, the company’s margin pressure is likely to alleviate in the near term.

Performance of Other Banks

JPMorgan Chase & Co. JPM kick-started the first-quarter earnings season on a positive note. Earnings of $1.35 per share beat the Zacks Consensus Estimate of $1.26, which was pretty conservative after a number of downward revisions lately. The figure shows a 7% improvement decline from the year-ago period, indicating the impact of challenging market conditions.

Wells Fargo & Company’s WFC first-quarter 2016 earnings recorded a positive surprise of about 1%. Earnings of 99 cents per share beat the Zacks Consensus Estimate by a penny. However, it compared unfavorably with the prior-year quarter’s earnings of $1.04 per share.

Lower trading revenues as well as a rise in credit costs led Bank of America Corporation’s BAC first-quarter 2016 earnings of 21 cents per share, which lagged the Zacks Consensus Estimate by a penny. Further, the bottom line witnessed a 16% year-over-year decline.

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