Fitch: PNC's 2Q'13 Earnings Solid Amidst Challenging Rate Environment

Wed Jul 17, 2013 1:18pm EDT

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(The following statement was released by the rating agency) CHICAGO, July 17 (Fitch) Amidst an increasingly challenging interest rate environment, PNC Financial Services Group, Inc. PNC reported a strong 1.49% return-on-asset (ROA) during second-quarter 2013 (2Q'13), according to Fitch Ratings. Earnings were supported by higher revenues, controlled expenses, and lower credit costs. PNC reported solid revenue numbers, especially as compared to the other large banks reporting to date. Total revenues advanced 3% sequentially supported by strong noninterest income growth. Conversely, as expected, spread income was down 5% on a sequential basis due to lower core net interest income and lower purchase accounting accretion (PAA). PNC reported a significant 23 basis point (bp) drop in the net interest margin (NIM). Even excluding the impact of PAA, PNC's core NIM declined 17 bps a linked-quarter basis. Reported noninterest income improved a significant 15% sequentially reflecting improvement across all fee income categories. Mortgage revenues (excluding repurchase expenses) held up relatively well, with loan origination volume up 11% compared to the prior quarter. Also aiding results, PNC reported an $83 million gain on the sale of Visa Class B shares. At June 30, 2013, unrealized gains in these holdings were approximately $700 million. Somewhat offsetting the growth in fee income, PNC reported an increase in mortgage repurchase provision expenses, at $73 million in 2Q'13, this after a basically flat first quarter. PNC has reported a good deal of volatility in mortgage repurchase expenses. As such, Fitch expects there could be further swings in this line item. Noninterest expenses were relatively well-controlled, increasing 2% on a sequential basis. Higher expenses were driven by increased marketing fees and incentive compensation costs. Excluding the impact of regulatory guidance on net charge-offs last quarter, NCOs declined a significant 35% from the prior quarter, and were just 44 bps in 2Q'13. PNC NCOs can be a bit lumpy from quarter-to-quarter. Fitch does not expect 44 bps to be a sustainable level. Reported nonaccrual assets also declined 3% on a sequential basis. PNC's reserve release of $51 million was down quite a bit from last quarter's release of over $200 million. PNC's reported an estimated Tier 1 common ratio of 10.1% at June 30, 2013, up 30 bps on a sequential basis. PNC disclosed its estimated Tier 1 common ratio of 8.2% under Basel III. Net unrealized pre-tax gains on PNC's available-for-sale securities portfolio declined to approximately $700 million at June 30, 2013, down from $1.6 billion at March 31, 2013. This reflects the increase in interest rates and widening asset spreads. As an Advanced Approach bank, PNC will be subject to fluctuations in AOCI under Basel III once it comes into effect Jan. 1, 2014. 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. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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