PNC PNC Financial Services Group Inc

PNC Financial Services Group Inc.’s (PNC) third-quarter 2011 adjusted earnings of $1.55 per share were ahead of the Zacks Consensus Estimate of $1.49. Results also compared favorably with adjusted earnings of $1.45 per share in the prior-year quarter.

Consequently, reported net income increased 8% year over year to $834 million. A substantial contraction in the provision for credit losses, a strong balance sheet and improved credit quality were attributed to the results. Moreover, decreased non-interest expenses were the upside. However, decline in top line acted as a headwind.

Quarter in Detail

Total revenue came in at $3.54 billion, down 2% from $3.60 billion in the prior-year quarter, and also below the Zacks Consensus Estimate of $3.57 billion. The drop was due to lower net interest income as well as non-interest income.

Net interest income for the reported quarter was $2.18 billion, down 1.8% year over year, but up 0.9% sequentially. Net interest margin dipped 4 basis points sequentially and plummeted 7 basis points year over year to 3.89%. The decrease in net interest margin was driven by low interest rate environment.

Non-interest income was down 5.5% sequentially and 0.7% year over year to $1.37 billion. The year-over-year decline was attributed to the impact of Regulation E rules pertaining to overdraft fees, partially offset by higher asset management fees. Moreover, lower corporate service fees drove the sequential decline.

Non-interest expense for the reported quarter inched down 1.8% sequentially and 0.9% year over year to $2.14 billion. PNC Financial's continuous efforts to improve has reduced costs and increased capacity to invest in businesses.

Credit Quality

Credit quality continuously improved in the quarter. Non-performing assets decreased 22% year over year to $4.3 billion, mainly aided by lower commercial real estate non-performing loans. The ratio of non-performing assets to total assets decreased 53 basis points year over year to 1.59%.

Net charge-offs plunged $249 million year over year to $365 million in the reported quarter. The provision for credit losses during the quarter was $261 million, down 46% from $486 billion in the prior-year quarter, principally driven by overall credit quality improvement and measures to reduce exposure levels. This reflects PNC Financial’s return to a moderate risk profile.

Capital Position

As of September 30, 2011, PNC Financial’s Tier 1 common capital ratio was an estimated 10.5%, in line with June 30, 2011 and up from 9.6% as of September 30, 2010. The Tier 1 risk-based capital ratio increased to an estimated 13.1% from 12.8% at the end of the prior quarter and 11.9% at the end of the prior-year quarter. The increase in the ratio was primarily due to the issuance of $1.0 billion of preferred stock in July 2011.

Total assets under administration were $202 billion at the end of the reported quarter, down from $219 billion in the prior quarter and $206 billion in the year-ago quarter.

Capital Deployment Update

The board of directors of PNC Financial declared a quarterly cash dividend on the company’s common stock of 35 cents per share payable on November 5, 2011.

PNC Financial did not repurchase shares in the first nine months of 2011. The share repurchase program, which does not bear a termination date, has been in effect since October 4, 2007 and has 25 million shares remaining.

Peer Performance

Considering PNC Financial’s peer group, Citigroup Inc.’s (C) third-quarter 2011 earnings per share of $1.23 outpaced the Zacks Consensus Estimate of 81 cents per share. The result also improved from the prior quarter's $1.09 per share and last year's 72 cents. Credit valuation adjustment (CVA) increased third-quarter earnings by 39 cents per share.

The better-than-expected result was driven by a drop in provisions for credit losses. Moreover, the top-line headwind at Citigroup was slightly relaxed with revenue increasing 1% from the prior quarter, and also managed to exceed the Zacks Consensus Estimate. Expenses also increased year over year.

Our Take

We believe continued strengthening of balance sheet, with a focus on risk and expense management, should propel its earnings ahead. Moreover, benefits from the 2008 National City acquisition continued to exceed the company's expectations. However, we expect the top line to remain restricted in the near term, with a continued soft demand for loans and a low interest rate environment. Regulatory initiatives also remain headwinds to both top and bottom lines.

PNC Financialcurrently retains its Zacks #3 rank, which translates into a short-term “Hold” rating. Moreover, considering the fundamentals, we are maintaining our long-term ‘Neutral’ recommendation on the stock.

 
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