PNC Runs Ahead of Estimates - Analyst Blog

PNC Financial Services Group Inc.'s (PNC) fourth-quarter adjusted earnings of $1.60 per share were ahead the Zacks Consensus Estimate of $1.40. Results also compare favorably with adjusted earnings of $1.56 in the prior quarter and 90 cents in the prior-year quarter.

Adjusted earnings for the quarter excluded integration costs of 10 cents. Adjusted earnings for the prior quarter excluded integration costs of 11 cents and gain of 62 cents on the sale of PNC Global Investment Servicing. For the year-ago quarter, adjusted earnings excluded integration costs of 22 cents and gain of $1.49 per share related to BlackRock Inc. (BLK) and Barclays Global Investors (BGI) transaction. Considering these non-recurring items, earnings came in at $1.50 compared with $2.07 in the prior quarter and $2.17 in the year-ago quarter.

A substantial decrease in the provision for credit losses, strong balance sheet and improved credit quality attributed to the results. However, lower revenues and higher non-interest expenses due to a challenging operating environment were on the downside.

For fiscal year ended 2010, the company reported adjusted earnings per share of $6.07, significantly ahead of the Zacks Consensus Estimate of $5.46. Including 63 cents per share for an after-tax gain on the sale of PNC Global Investment Servicing, integration costs of 48 cents per share and a reduction of 48 cents per share related to the redemption of TARP preferred shares, earnings were $5.74 per share.

Behind the Headlines

Total revenue came in at $3.9 billion, down 20% from $4.9 billion in the prior-year quarter. The decrease was attributable to lower net interest income and non-interest income. However, revenue surpassed the Zacks Consensus Estimate of $3.5 billion. For full year 2010, the company reported revenue of $15.2 billion, down 6% year over year, but above the Zacks Consensus Estimate of $14.8 billion.

Net interest income for the reported quarter was $2.2 billion, down 0.6% sequentially and 6.2% year over year. Net interest margin decreased 6 basis points sequentially and 12 basis points year-over-year to 3.93%. The decrease in net interest income and the margin was attributed to lower purchase accounting accretion, continued soft loan demand and the low interest rate environment, which were partially offset by deposit repricing.

Non-interest income edged up 21% sequentially, but inched down 32% year over year to $1.7 billion. The sequential increase was primarily due to higher corporate service fees and asset management fees, partially offset by lower residential mortgage fees and service charges on deposits.

The year-over-year decrease was attributed to lower service charges on deposits from the decrease in overdraft fees, which was partially offset by the gain on the sale of BlackRock shares, higher corporate service fees and higher asset management fees.

For fiscal year 2010, PNC reported net interest income of $9.2 billion, up 1% year over year, while non-interest income totaled $5.9 billion, down 17% year over year.

Non-interest expense for the reported quarter increased 4.5% both sequentially and year over year to $2.3 billion. The sequential increase was primarily due to continued investments in the businesses, higher residential mortgage expenses and higher compensation costs. Further, the year-over-year increase resulted from investments for expanding businesses, partially offset by acquisition cost savings and lower integration costs.

For fiscal year 2010, the company reported non-interest expenses of $8.6 billion, down from $9.1 billion in the prior year. PNC succeeded in achieving its acquisition cost savings goal of $1.8 billion on an annualized basis in the fourth quarter of 2010.

Credit Quality Analysis

Credit quality significantly improved in the quarter. Non-performing assets decreased 16% year over year to $5.3 billion, mainly aided by lower commercial real estate nonperforming loans and lower residential real estate nonperforming loans. The ratio of non-performing assets to total assets decreased 33 basis points year over year to 2.01%.

Net charge-offs decreased $44 million year over year to $791 million in the reported quarter.

The provision for credit losses during the quarter was $442 million, whopping down 56% from $1 billion in the prior-year quarter, principally driven by overall credit quality improvement during fiscal year 2010 and actions to reduce exposure levels. This reflects PNC's return to a moderate risk profile.

Capital Evaluation

As of December 30, 2010, PNC's Tier 1 common capital ratio was an estimated 9.8%, up from 9.6% as on September 30, 2010 and 6.0% as on December 31, 2009.  The Tier 1 risk-based capital ratio increased to an estimated 12.1% from 11.9% at the end of the prior quarter and 11.4% at the end of the prior-year quarter. The increase in the ratios was primarily due to retention of earnings and lower risk-weighted assets.

Performance by Peers

One of PNC's closest competitors – JPMorgan Chase & Co. (JPM) -- reported fourth quarter earnings, substantially ahead of the Zacks Consensus Estimate. The better-than-expected numbers were primarily supported by higher non-interest revenue and a slowdown in provision for credit losses, which more than offset a rise in non-interest expense primarily due to increased litigation reserves.

Major competitor of PNC, Bank of America Corporation (BAC) will be releasing its fourth quarter earnings on January 21, 2011.

PNC continues to strengthen its balance sheet with focus on risk management. Further, gain on sale of PNC Global Investment Servicing added to the overall robust earnings during the year.

However, we expect the top line to remain restricted, with continued soft demand for loans and low interest rate environment. Regulatory initiatives also remain a headwind for top line. Nevertheless, with strong balance sheet and solid capital levels, the company may opt for dividend increases in the upcoming quarters.

PNC currently retains its Zacks #3 Rank, which translates to a short-term Hold rating. Considering the fundamentals, we are maintaining our Neutral recommendation on the stock.

Since the announcement of the results, the share price of PNC has decreased by 2.3%.

 
BANK OF AMER CP (BAC): Free Stock Analysis Report
 
BLACKROCK INC (BLK): Free Stock Analysis Report
 
JPMORGAN CHASE (JPM): Free Stock Analysis Report
 
PNC FINL SVC CP (PNC): Free Stock Analysis Report
 
Zacks Investment Research