DBRS: PNC Solid 4Q13 Earnings Benefit from a Resi Mtg Repurchase Reserve Release

Summary:

• 4Q13 earnings to common shareholders of $998 million, up from $966 million for 3Q13 and up from $664 million for 4Q12
• Credit improvement was sustained resulting in additional reserve releases
• DBRS rates PNC Financial Services Group, Inc’s Issuer & Senior debt at A (high) with a Stable trend

DBRS, Inc. (DBRS) considers PNC Financial Services Group Inc’s (PNC or the Company) 4Q13 earnings to be solid, despite sustained NIM pressure and moderating residential mortgage banking income. Importantly, the Company’s diverse lending and fee income businesses provide offsets for these headwinds and stability to earnings.

DBRS notes that PNC’s 4Q13 bottom line benefitted from a $124 million (pre-tax) release of reserves for residential mortgage repurchase obligations (related to agreements with FNMA and FHLMC) along with sustained loan loss reserve releases, driven by improving asset quality. DBRS considers PNC’s sustained profitability, strong and diverse banking franchise and solid funding and capital profiles as supportive of its rating level.

Despite a narrowing of its NIM by 9 bps, PNC’s 4Q13 spread income increased 1.4% sequentially, due to 2.1% average loan growth in the quarter. The loan growth mostly reflected increased levels of commercial real estate and specialty lending, as well as automobile and credit card exposures. The narrower NIM was mostly attributable to higher levels of deposits at banks as the Company prepares for anticipated LCR requirements. Meanwhile, non-interest income increased by 7.2%, QoQ, mostly reflecting the aforementioned residential mortgage repurchase obligation reserve release, a 10.3% increase in asset management revenue and a 3.5% increase in consumer services income.

Asset quality, continues to improve, with nonperforming assets and net charge-offs declining during the quarter. This improvement resulted in PNC taking a $76 million reserve release in 4Q13, down from $87 million for 3Q13. Despite the sustained reserve release, the Company’s reserve coverage remains sufficient at 1.8% of loans.

Positively, PNC continued to build its solid capital position, which reflected a Tier 1 common ratio of 10.5%, and a Tier 1 risk based capital ratio of 12.4% at December 31, 2013. Moreover, the Company estimates that its common equity Tier 1 ratio under Basel III was approximately 9.4%.

DBRS rates PNC Financial Services Group, Inc.’s Issuer & Senior debt at A (high) with a Stable trend.

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

[Amended on December 23th, 2014 to remove unnecessary disclosures.]