Fitch: PNC's 1Q'13 Earnings Performance Improvement, Though Based on Lower Expenses

Wed Apr 17, 2013 1:06pm EDT

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(The following statement was released by the rating agency) CHICAGO, April 17 (Fitch) PNC Financial Services Group, Inc. (PNC) reported a decline in total revenues for 1Q'13, similar to other banks reporting to date according to Fitch Ratings. Expenses fell considerably on a sequential basis, given the lack of several one-time expense items. Bottom line results were also aided by a healthy decline in provision expenses. PNC's ROA of 1.34% is considered good, especially in light of the challenging interest rate environment. Spread income was down slightly on a sequential basis due to lower purchase accounting accretion. PNC also reported further compression its net interest margin. However, excluding the impact of purchase accounting accretion, PNC's core NIM has held roughly flat both on a linked-quarter basis and from a year ago at 3.43%. Due to further declines in purchase accounting accretion, PNC expects spread income to fall approximately 2% to 3% in 2Q'13. Reported noninterest income declined 5% sequentially reflecting declines in many fee income categories, which was partially offset by a significant decrease in mortgage repurchase expenses. In 4Q'12, the company's provision for residential mortgage loan repurchase obligations totaled $254 million, compared to virtually nothing this quarter. PNC has reported a great deal of volatility in mortgage repurchase expenses, and Fitch expects there could be further swings in this line item. Outside of the mortgage repurchase expenses and excluding the $130 million gain on sale of Visa shares last quarter, overall noninterest income was generally down across all categories, including mortgage revenues. PNC reported very strong results last quarter in merger and acquisition advisory fees and capital markets activities, which declined 21% on a sequential basis. Noninterest expenses declined 15% on a linked-quarter basis reflecting improvement in all reported expense categories and the lack of material one-time charges during the quarter. In 4Q'12, PNC reported several non-core items, including charges related to the foreclosure settlement, mortgage banking goodwill impairment, the redemption of trust preferred securities, and merger integration costs. PNC expects increases of between 2% and 3% in noninterest expenses next quarter. PNC reported a sizeable reserve release in 1Q'13 with NCOs outpacing provision expenses by roughly $220 million. This follows last quarter's small incremental reserve build. PNC reported asset quality deterioration in 1Q'13. Similar to the two previous quarters, asset quality numbers were impacted by the adoption of regulatory guidance, increasing nonaccrual assets by $426 million and net charge-offs by $134 million in 1Q'13. During the current quarter, PNC adopted the regulatory guidance that many other banks had adopted earlier in 2012 in which the bank placed a performing second-lien behind a delinquent first lien as nonaccrual. PNC reported $45 million in NCOs in 4Q'12 related to the adoption of OCC guidance pertaining to borrowers discharged from bankruptcy. Excluding the impact of the regulatory guidance from both quarters, NCOs still increased a significant 22% on a sequential basis. Fitch notes that while the adoption of this regulatory guidance had the overall effect of accelerating NCOs and increasing nonaccrual balances, delinquencies declined 19% sequentially. PNC's reported an estimated Tier 1 common ratio of 9.8% at March 31, 2013, up 20bps on a sequential basis, and roughly in line with regional bank peer averages. PNC disclosed its estimated Tier 1 common ratio of 7.9% under Basel III, including the application of Basel II.5 rules. Though this ratio is somewhat below the average for other large regional banks, Fitch views PNC's capital profile favorably given its overall risk profile and earnings capacity. Further, PNC continues to make progress towards meeting its operating range of 8% to 8.5% by year-end 2013. Contact: Julie Solar Senior Director +1-312-368-5472 Fitch Ratings, Inc. 70 West Madison Street Chicago, IL 60602 Justin Fuller Director +1-212-908-2057 Media Relations: Brian Bertsch, New York, Tel: +1 212-908-0549, Email: brian.bertsch@fitchratings.com. Additional information is available at 'www.fitchratings.com'. ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. 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