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Will PNC Financial (PNC) Earnings Lag on Lower Fee Income?

The PNC Financial Services Group, Inc. PNC is scheduled to report first-quarter results, before the opening bell on Thursday, Apr 14, 2016.

The Pennsylvania-based company delivered better-than-expected results in the final quarter of 2015 on the back of reduced expenses. However, the quarter recorded lower revenues and higher provisions. Notably, the company’s fourth-quarter earnings beat the Zacks Consensus Estimate by 3.9% as well as exceeded the year-ago tally by 1.6%.

PNC Financial delivered an earnings beat in all the trailing four quarters with an average earnings surprise of 4.80%. But, industry wide weakness and global macroeconomic concerns are expected to affect the company’s performance this time.

Will the company succumb to the challenges faced by the industry during the quarter? Let’s see how things have shaped up.

What to Expect in Q1?

Overall, the banking industry continued to operate in a challenging environment during the first-quarter 2016 which saw market turmoil driven by a number of headwinds including concerns over the Chinese economy and the volatility in oil price. Amid such a backdrop, we do not expect PNC Financial to report impressive results this time.

In mid December last year, the Federal Reserve raised interest rates for the first time in nearly a decade. The company should show a slight improvement in net interest margin (NIM) in first-quarter 2016 in reflection of the full quarter impact of the rate hike. However, the benefits from rise in interest rates are likely to be offset by lower investment securities yields.

Management noted in its fourth-quarter 2015 conference call that compared with fourth-quarter, net interest income is expected to rise in low-single digits in the first-quarter. However, fee income, comprising of revenues from asset management, consumer services, corporate services, residential mortgage and service charges on deposits, is expected to fall sequentially in mid-single digits. The decline in the non-interest income is primarily due to seasonality and generally subdued client activity in the first quarter.

Hence, the upcoming release is not likely to reflect substantial growth in revenues, rather it may remain flattish.

However, results are likely to be supported by the company’s continued focus on driving operational efficiency through its cost-containment efforts. Notably, non-interest expense is projected to decline in low-single digits on sequential basis.

Regarding exposure in the energy sector, PNC Financial’s portfolio in the oil and gas industry stood at $2.6 billion as of Dec 31, 2015, representing just 1% of the company’s total loan portfolio. Management anticipates the company’s total provision for loan losses in a range of $75–$125 million for first quarter.  However, the the performance of certain energy related loans during the first quarter might lead to the provisions at the high end of this range.

Considering the broader lending picture, the company’s exposure to the energy sector is rather minimal, hence tumbling oil prices are less likely to affect the company’s credit quality significantly; thereby safeguarding its profitability.

Among others factors, loan growth could act as a positive. While average loans are expected to remain stable in the first quarter due to impact of de-recognition of impaired loans in fourth-quarter 2015, period-end loans are projected to rise modestly.

PNC Financial’s activities during the quarter were inadequate to win analysts’ confidence. As a result, over the last seven days, the Zacks Consensus Estimate for the quarter decreased to $1.69 per share from $1.71.

Earnings Whisper

Our proven model does not conclusively show that PNC Financial is likely to beat the Zacks Consensus Estimate in the first quarter. That 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. Unfortunately, this is not the case here, as elaborated below.

Zacks ESP: The Earnings ESP, for PNC Financial is 0.00%. This is because the Most Accurate estimate is on par with the Zacks Consensus Estimate of $1.69 per share.

Zacks Rank: PNC Financial’s Zacks Rank #3 (Hold) increases the predictive power of ESP. However, we also need to have a positive ESP to be confident of a positive earnings surprise.

Stocks that Warrant a Look

Here are some stocks worth considering, as according to our model they have the right combination of elements to post an earnings beat this quarter.

The Earnings ESP for BlackRock, Inc. BLK is +1.85% and the company carries a Zacks Rank #2. It is scheduled to release results for the first-quarter on Apr 14.

PrivateBancorp, Inc. PVTB has an Earnings ESP of +1.75% and carries a Zacks Rank #3. It is expected to report first-quarter results on Apr 21.

People's United Financial Inc. PBCT has an Earnings ESP of +4.76% and carries a Zacks Rank #3. It is slated to report first-quarter results on Apr 21.

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