DBRS: PNC’s 3Q14 In-line With Expectations; NIM Remains Pressured & Avg QoQ Loan Growth Slows

Summary:
• 3Q14 earnings to common shareholders of $966 million, down 3.5% from $1.0 billion for 2Q14.
• Lower earnings reflected a narrowing NIM, a modest increase in non-interest expense and higher preferred stock dividends and discount accretion and redemptions.
• 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) 3Q14 results as being in line with expectations. Lower quarter-on-quarter (QoQ) earnings reflected a sustained narrowing of the net interest margin (NIM), driven by lower earning asset yields and a higher level of liquid assets. Importantly, average loan growth was sustained, although moderated from the prior quarter. Positively, linked-quarter fee income continued to improve, bolstered by higher levels of asset management revenue. Notwithstanding pressured earnings, DBRS considers PNC’s balance sheet fundamentals as strong, underscored by sustained average loan growth, improved asset quality and solid funding and capital profiles.

Reflecting the difficult operating environment, PNC’s NIM continued to narrow, down 14 bps to 2.98%, QoQ. The narrower NIM was due to increased levels of liquid assets, in preparation for the liquidity coverage ratio, and lower average loan and securities yields. Meanwhile, adjusted fee income (DBRS calculated: excluding securities gains and losses, and other-than temporary impairment, residential mortgage repurchase obligations, and Visa gains) improved 2.8%, linked-quarter, reflecting higher levels of asset management fees, corporate service fees and deposit service charges. Overall, the Company expects 4Q14 fee income to remain consistent with 3Q14.

Despite increasing 1.2%, QoQ, non-interest expense was well managed. Higher expenses were driven by increases in personnel and equipment costs. Higher personnel expenses reflected increased variable compensation costs, driven by business activity. DBRS notes that on a year-on-year basis, expenses decreased by 1.6%, benefiting from the Company’s Continuous Improvement Program (CIP). Positively, in 3Q14, PNC completed actions to achieve $500 million in cost saves from CIP. DBRS notes that these costs saves will be invested back into the Company.

Despite an ongoing stock repurchase program, 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 10.1% at September 30, 2014, up from 10.0% at June 30, 2014.

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

Note:
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.