We have reiterated our Neutral recommendation on
PNC Financial Services Group Inc.
) based on its fundamentals, recent announcement to beef up its
residential mortgage repurchase reserves and the current stretched
PNC Financial's first-quarter 2012 earnings per share came in at
$1.67, comfortably surpassing the Zacks Consensus Estimate of
$1.45. The company's upbeat performance was attributed to improved
revenue levels. Moreover, decreased non-interest expenses reflect
better expense management.
Contraction in the provision for credit losses was also on the
upside. Yet, the company incurred a couple of one-time charges in
the quarter and nonperforming assets also increased.
Last week, at
) financials conference, PNC Financial announced its plan to boost
its residential mortgage repurchase reserves by around $350 million
in the second quarter of 2012. The decision follows the recently
elevated levels of government sponsored enterprise (GSE)-related
The increased levels of GSE-related repurchase demands for PNC
Financial are primarily in 2005-08 vintages and the major reasons
cited for the recent claims include property values and missing
documentation. The reserve additions will result in life-to-date
accrued losses of $1.6 billion. The mortgages are mostly originated
by National City Corp.
Going forward, we believe PNC Financial is well positioned to
grow given its diverse business mix, balance sheet strengthening
efforts, strategic acquisitions and solid capital levels. Stress
test clearance, dividend hikes and share buybacks also serve as
Yet, a protracted economic recovery, continued low interest rate
environment, increased regulatory headwinds as well as elevated
mortgage repurchase costs seem to somewhat limit growth in the
The risk-reward profile of PNC financial seems somewhat balanced
and therefore we have reaffirmed our Neutral recommendation on the
stock. Additionally, PNC Financial shares currently retain the
Zacks #3 Rank, which translates to a short-term Hold rating.
MORGAN STANLEY (MS): Free Stock Analysis Report
PNC FINL SVC CP (PNC): Free Stock Analysis
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