DBRS: PNC’s 1Q14 Earnings Down QoQ, Reflecting Lower Resi Mtg Repurch Reserve Release

Summary:
• 1Q14 earnings to common shareholders of $992 million, down from $1,011 million for 4Q13, yet up from $928 million for 1Q13.
• Lower QoQ earnings mostly reflected a decrease in benefit from release of reserves for residential mortgages.
• DBRS rates PNC Financial Services Group, Inc’s Issuer & Senior debt at A (high) with a Stable trend.

Reflecting the difficult business environment, DBRS, Inc. (DBRS) considers PNC Financial Services Group Inc.’s (PNC or the Company) 1Q14 earnings to be sound. Overall, DBRS views the Company’s strong banking franchise, underpinned by diverse lending and fee income businesses, improving asset quality, and solid funding and capital profiles as supportive of its rating level.

Lower 1Q14 earnings, quarter-on-quarter (QoQ), mostly reflected a decrease in benefit from release of reserves for residential mortgages (related to agreements with FNMA and FHLMC), sustained net interest margin (NIM) pressure, and some seasonality within a few of its fee revenue components. Partially offsetting these headwinds, the Company recognized a sizable gain from the sale of Visa Class B common shares, and sustained loan loss reserve releases, driven by improving asset quality.

As with most banks, PNC’s spread income remains pressured by the low interest rate environment and slow growing economy. The Company reported moderately lower QoQ net interest income, driven by a narrower NIM, partially offset by higher levels of average loans. The lower NIM mostly reflected lower levels of purchase accounting accretion and fewer days in the period. Loan growth was sustained and primarily reflected increased levels of commercial and commercial real estate exposures. Finally, expenses were well managed linked-quarter.

Asset quality continues to improve, with nonperforming assets and net charge-offs declining during the quarter. This improvement resulted in PNC taking a $92 million reserve release in 1Q14, up from $76 million for 4Q13. Despite the sustained reserve releases, the Company’s reserve coverage remains sufficient.

Positively, PNC continues to improve its solid capital position, which reflected an estimated common equity Tier 1 ratio under Basel III (fully phased in) of 9.7%. DBRS notes that the Company intends to return more capital to its shareholders and recently announced that it would increase its quarterly common stock dividend by 9% and repurchase up to $1.5 billion of common stock over the next four quarters.

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.]