DBRS: PNC’s 2Q14 Results Remain Sound; Sustained Avg. Loan Growth and Higher Customer Activity

Summary:
• 2Q14 earnings to common shareholders of $1.0 billion, up from $992 million for 1Q14.
• Earnings benefited from sustained loan growth and higher customer activity.
• DBRS rates PNC Financial Services Group, Inc’s Issuer & Senior debt at A (high) with a Stable trend.

DBRS, Inc. (DBRS) views PNC Financial Services Group, Inc.’s (PNC or the Company) 2Q14 results as sound. Despite continued net interest margin (NIM) contraction, PNC’s earnings benefited from sustained average loan growth and improved customer activity. Nonetheless, and reflective of the difficult business environment, the Company’s linked-quarter adjusted income before provisions and taxes was flat quarter-on-quarter, (QoQ), as a 1.9% increase in adjusted revenues was balanced by a 2.8% increase in expenses. Notwithstanding pressured earnings, DBRS considers PNC’s balance sheet fundamentals to be strong, underscored by sustained loan growth, improved asset quality and solid funding and capital profiles.

Positively, the Company again generated solid average loan growth in 2Q14 (up 1.3%), led by higher levels of average commercial loans, partially offset by a decrease in average consumer loans.

Even with sound loan growth, PNC’s net interest income decreased 3.0%, QoQ, due to lower core spread income and purchase accounting accretion. The decline in core spread income reflected a 2014 change in classification to non-interest income for certain commercial facility fees, a decline in average securities and higher borrowed fund balances. Further pressuring the Company’s spread income were lower loan yields and higher levels of deposit balances at the Federal Reserve Bank. As a result, the Company’s NIM narrowed by 14 bps to 3.12%.

Adjusted fee income, which excludes securities gains and losses, provisions for residential mortgage repurchase obligations and Visa gains, improved 9.0%, linked-quarter, driven by higher levels of consumer fees, corporate service fees and residential mortgage fees. Higher consumer fees were attributable to improved customer activity, while higher corporate service fees reflected the before-mentioned 2014 classification change, as well as higher treasury management fees. Overall, the Company expects 3Q14 fee income to remain consistent with 2Q14.

Non-interest expenses were up QoQ, in part, due to seasonally lower expenses in 1Q14. Higher expenses were driven by increased levels of salary compensation expense, incentive compensation costs, and marketing expenses. DBRS notes that on a YoY basis, expenses decreased by 3.0%, benefiting from the Company’s continuous improvement program.

Despite the repurchase of common shares in 2Q14, PNC’s capital position remains solid and improved. Specifically, the Company’s estimated common equity Tier 1 ratio under Basel III (fully phased in) was 10.0% at June 30, 2014, up from 9.7% at March 31, 2014.

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.

For additional information on this rating, please refer to the linking document under Related Research.