July 17, 2017 / 1:34 PM / in 5 months

Fitch: PNC's 2nd Quarter Earnings Lifted by Higher Interest Rates

(The following statement was released by the rating agency) CHICAGO, July 17 (Fitch) PNC Financial Services Group, Inc. (PNC) reported $1.1 billion of net income in the second quarter of 2017 (2Q17), up 2.1% on a linked quarter basis and 10.9% from the year-ago period. Return on average assets (ROA) was flat from the linked quarter at 1.2% while return on average equity (ROE) increased modestly to 9.9%. PNC's higher net income was driven by growth in net interest and noninterest revenue, offset by higher personnel costs and slightly higher credit costs. Fitch Ratings continues to view PNC's earnings favorably, particularly in light of the sluggish economic environment. Net interest income grew 4.5% sequentially driven by higher loan yields, an extra day in the quarter, and loan growth, offset somewhat by higher funding costs. PNC saw its net interest margin expand by 7 bps sequentially and 14 bps from the year-ago quarter. This was driven by higher asset yields due to short-term interest rate increases while deposit betas remained low, particularly on retail deposits, similar to peers. PNC's noninterest income grew by 4.5% sequentially, driven by growth in debit and credit card interchange, loan syndication and treasury management fees. Operating lease income also grew due to PNC's purchase of ECN Capital's commercial and vendor finance business. Offsetting these areas was a modest decline in asset management, which includes the BlackRock investment, along with an 8% decline in mortgage banking revenue. Similar to Wells Fargo & Company, PNC noted that gain on sale margins in mortgage banking shrank quite significantly during the quarter, despite higher originations, due to reduced activity in the refinance market and a highly competitive purchase market. Fitch expects the purchase market to remain highly competitive moving forward. PNC achieved 2% sequential and 4% year-over-year loan growth during the quarter, primarily from commercial lending, while retail loans remained flat. Commercial loan growth of $5.1 billion was broad-based across asset classes and included $1 billion of loans and leases from the ECN Capital acquisition. Consumer loans were roughly flat as higher mortgage, auto, and credit card balances were offset by lower home equity and student loan balances. Management stated that it has not been pulling back in the auto business as have some of its peers, although PNC does not make subprime auto loans, which mitigates this to a certain extent. PNC's credit quality remained solid with just 20 bps of net charge-offs (NCOs) during the quarter, a 3-bp improvement sequentially. Non-performing loans also decreased by 2% from the prior quarter. PNC's provision expense was below its NCOs resulting in a $12 million reserve release compared to a $30 million reserve release in 1Q17. Results included an initial provision for the ECN Capital acquisition. PNC reported that its estimated Common Equity Tier 1 Ratio under the fully phased-in Basel III standardized approach was 9.8%, a modest decline from 10% in the prior quarter. This change was driven by higher risk-weighted assets from loan growth against a flat capital base. PNC returned $956 million of capital to shareholders during the quarter, equivalent to an 93% payout ratio. PNC recently received a non-objection to its 2017 capital plan from the Federal Reserve as part of the Comprehensive Capital Analysis and Review. The plan includes up to $2.7 billion of common share repurchases over the next four quarters, compared to $2.3 billion repurchased over the past four quarters, and a 36% increase in the common stock dividend. PNC reiterated its full-year 2017 guidance with mid-single-digit loan growth, revenue growth at the upper end of mid-single digits, and non-interest expense growth in low-single digit range. Management also noted that it expects modest loan growth, low-single-digit net interest income growth, stable fee income, and flat expenses during 3Q17 relative to 2Q17, with a provision between $75 million and $125 million. Contact: Julie Solar Senior Director +1-312-368-5472 Fitch Ratings, Inc. 70 West Madison Street Chicago, IL 60602 Justin Fuller Senior Director +1-312-368-2057 Media Relations: Elizabeth Fogerty, New York, Tel: +1 (212) 908 0526, Email: elizabeth.fogerty@fitchratings.com; Sandro Scenga, New York, Tel: +1 212-908-0278, Email: sandro.scenga@fitchratings.com. Additional information is available on 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 WEB SITE AT WWW.FITCHRATINGS.COM. 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