Fitch: PNC's Earnings Lower; In Line with Expectations

CHICAGO--(BUSINESS WIRE)-- PNC Financial Services Group, Inc. (PNC) reported a drop in quarterly earnings in 1Q'15, though Fitch Ratings views the results as still solid, and in line with expectations. Revenue headwinds, reflective of a challenging low interest rate environment, were only partially offset by decent expense management discipline.

Similar to peers reporting to date, spread income fell slightly, mainly attributed to two fewer days in the quarter as higher loan and securities balances were offset by lower yields.

Excluding the impact of purchase accounting accretion (PAA) on the NIM, PNC's core NIM declined 7 bps on a linked-quarter basis to 2.65%, well below the average for the large regional banks. Although PNC's margin continues to compress and remains below peer levels, PNC has good revenue diversity, with noninterest income comprising a healthy 44% of reported revenues in 1Q'15, insulating the company somewhat from the impacts of the low interest rate environment on bank margins. Further, some of the margin compression over the past year is attributed to actions taken by PNC to improve its liquidity profile in preparation for new liquidity-related regulatory rules.

Noninterest income last quarter reflected $94 million in gains on the sale of the company's Washington DC regional headquarters building, and $36 million in additional gains on the sales of VISA shares. Excluding these items, noninterest income fell roughly 4% from last quarter on lower merger and acquisition advisory fees and deposit service charges, partially offset by higher net hedging gains on mortgage servicing rights.

Expenses fell 7% following some large items last quarter, including a charitable contribution to the PNC Foundation, higher legal and residential and mortgage compliance costs, and increased fixed asset write-offs. Excluding the elevated expense items outlined above, core expenses declined 2.5% reflecting broad-based improvement along many categories.

The credit environment remains quite benign, and NCOs remained low at just 20bps in 1Q'15. However, Fitch notes that NCOs at this level are likely unsustainable for the company and the industry. PNC has indicated in the past that its through the cycle loss expectations are between 50bps and 60bps.

PNC reported its estimated fully phased-in Tier 1 common ratio (CET1) under Basel III standardized approach rules fell just slightly to an estimated 9.9% CET1 at March 31, 2015. Fully phased-in Basel III standardized risk-weighted assets increased by $5.7 billion or around 2% during the quarter, and include credit and market RWA.

PNC also disclosed that its estimated pro forma Liquidity Coverage Ratio was in excess of 100% at both the consolidated and bank levels at quarter-end. This more than exceeds the minimum phased-in requirement of 80%, which became effective for Advanced Approach banks on Jan. 1, 2015.

Additional information is available at 'www.fitchratings.com'.

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Fitch Ratings
Julie Solar
Senior Director
+1 312-368-5472
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
or
Justin Fuller
Director
+1 212-908-2057
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Media Relations:
Alyssa Castelli, +1 212-908-0540
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Elizabeth Fogerty, +1 212-908-0526
[email protected]

Source: Fitch Ratings

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