DBRS Comments on PNC’s 3Q13 Earnings – Senior at A (high) – Ratings Unchanged

DBRS, Inc. (DBRS) has today commented that its ratings for PNC Financial Services Group, Inc. (PNC or the Company), including its Issuer & Senior Debt rating of A (high) are unchanged following the release of the Company’s 3Q13 results. The trend on all ratings is Stable. PNC reported net income attributable to common shareholders of $966 million for 3Q13, down from $1.1 billion for 2Q13, but up from $876 million for 3Q12. DBRS notes that 3Q13’s $85 million pre-tax Visa gain was similar to 2Q13’s Visa gain. Moreover, the Company still had approximately $675 million of remaining pre-tax Visa gains based on the fair market value at quarter-end, which bolsters financial flexibility.

Highlights of the quarter include solid loan and deposit growth, expense discipline, and continued improvements in asset quality and capital contributing to a stronger balance sheet.

Despite loan growth, net interest income declined by $24 million, or 1%, to $2.2 billion reflecting net interest margin pressure and a decline in purchase accounting accretion. Indeed, the Company’s reported net interest margin compressed an additional 11 bps to 3.47%, while the core margin also declined 9 bps to 3.17% sequentially even with average earning assets increasing by 1.4% to $260 billion. PNC noted that the purchase accounting benefit for 2014 should decline by approximately $300 million compared to 2013.

Positively, loans grew $3.1 billion, or 2%, to $193 billion including $900 million of purchased jumbo residential mortgage loans. Growth in consumer loans was relatively broad-based and commercial real estate lending balances grew $1.1 billion. PNC noted that client and loan growth in the Southeast is significantly outpacing its legacy markets on a percentage basis. Meanwhile, deposits grew $3.8 billion, or 2%, to $216 billion. Overall, PNC’s loan to deposit ratio is strong at 89%.

Noninterest income declined by $120 million, or 7%, to $1.7 billion primarily driven by the impact of higher asset sales and valuations in 2Q13, and lower residential mortgage banking revenues. Residential mortgage banking revenues declined by 20% to $193 million, as both origination volumes (down 21%) and gain on sale margins compressed. To better align expenses with revenues, the Company is eliminating approximately 7% of the workforce in mortgage banking. Meanwhile, PNC’s provision for residential mortgage repurchase obligations was a benefit of $6 million compared to a provision of $73 million in 2Q13. DBRS notes that noninterest income comprised a high 43% of total revenues, which helps support the rating, especially in today’s low interest rate environment.

Expenses remain well controlled with core expenses declining by $11 million sequentially to $2.4 billion and the Company has already achieved its $700 million Continuous Improvement Program target goal for 2013. PNC reduced its branch count by 62 during the quarter and the Company remains on track to close approximately 200 branches overall in 2013.

Credit quality continued to improve during the quarter, with both delinquencies and nonperforming assets (NPAs) declining. Specifically, NPAs declined another $156 million to $3.6 billion, or 1.87% of total loans, OREO and foreclosed assets compared to 1.99% in 2Q13. The improvement was broad-based across asset classes, but included $354 million of loans returned to performing status during the quarter. While net charge-offs increased $16 million to $224 million, or 0.47% of average loans (annualized), gross charge-offs were down $16 million. As a result of the continued improvements in asset quality, PNC’s provision for credit losses declined by $20 million to $137 million, which caused the allowance for loan and lease losses to contract to a still sound 1.91% of total loans. The Company guided towards a loan loss provision of between $150 million and $225 million for 4Q13, which will likely include additional reserve releases if credit quality continues to improve.

The Company noted that its estimated pro forma fully phased-in Basel III Tier 1 common capital ratio increased to 8.6% from 8.2% during the quarter under the advanced method, which is already above the 8.5% high end range targeted by management for year-end. As a result, PNC is well positioned to return more capital to shareholders in 2014.

Notes:
All figures are in U.S. dollars unless otherwise noted.

[Amended on May the 23rd, 2014 to remove unnecessary disclosures.]