DBRS: PNC 4Q Solid; Revenues Pressured by Narrowing NIM; Expenses Well Managed; Strong Balance Sheet

Summary:
• 4Q14 earnings to common shareholders of $988 million, up 2.3% from $966 million for 3Q14.
• Higher quarter-over-quarter (QoQ) earnings primarily reflected several items, including the gain on the sale of a building, lower income taxes, and a decrease in preferred stock dividends.
• 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) 4Q14 earnings results as solid, despite the challenging operating environment. Improved QoQ earnings mostly reflected the gain on sale of PNC’s Washington D.C. building, tax benefits related to its contribution to the PNC Foundation, and lower preferred stock dividends. Non-interest revenues rose moderately, linked-quarter on an adjusted basis (excluding several non-core items, including the $94 million gain on the sale of the building). As with many banks, the low interest rate environment and tepid loan growth continue to pressure spread income and the net interest margin (NIM). Meanwhile, expenses remain well managed. Importantly, the Company’s balance sheet fundamentals remained solid and strengthened in the quarter reflecting moderate loan and deposit growth, sound and improved asset quality, and solid funding and capital profiles.

As with many banks, PNC’s spread income remained pressured, dipping 0.3% QoQ, due to a 9 bps narrowing of the NIM to 2.89%. The narrower NIM mostly reflected liquidity actions and lower levels of purchase accounting accretion. Going forward, the Company expects 1Q15 spread income to remain stable, and fee income to dip mid-single digit (percentage) from 4Q14 due to seasonality and client activity.

Expenses remained well managed, as the bulk of the 7.7%, QoQ, increase was mostly driven by the Company’s contribution to the PNC foundation, as well as higher legal and residential mortgage compliance costs, and increased fixed asset write-offs. Overall, DBRS views favorably, PNC’s completed actions (in 3Q14) to achieve $500 million in cost saves from its “Continuous Improvement Program”. The cost saves will be invested back into the Company. Positively, PNC anticipates that non-interest expense will be down high single digits in 1Q15.

Notwithstanding $1.1 billion of stock repurchases from programs in 2014, PNC’s capital position remains strong, as evidenced by the Company’s estimated common equity Tier 1 ratio under Basel III (fully phased in) of 10.0%, at December 31, 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.