PNC Financial Earnings Beat on Cost Control - Analyst Blog

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The PNC Financial Services Group, Inc. 's ( PNC ) reported an earnings surprise of almost 13%, which was primarily attributable to the company's efforts to realign its branch network in a cost-effective manner. The company's fourth-quarter 2013 earnings per share of $1.85 outpaced the Zacks Consensus Estimate of $1.64. Moreover, this compared favorably with $1.24 earned in the prior-year quarter.

For the year 2013, the company earnings per share of $7.39 outpaced the Zacks Consensus Estimate of $7.19. Further, this compared favorably with $5.30 earned in the prior year.

Better-than-expected results were primarily driven by decrease in both operating expenses and provision for credit losses. Further, marginal improvement in the top line, an enhanced credit quality and healthy capital ratios were the positives. However, a fall in net interest income was a concern.

The company reported net income attributable to common shareholders of $998.0 million in the reported quarter, up 50% from the year-ago quarter. For 2013, the company reported net income applicable to shareholders of $4.0 billion, up 40% year over year.

Quarter in Detail

Total revenue came in at $4.1 billion, nudging up 0.1% year over year. The rise was mainly due to higher non-interest income. Total revenue was also above the Zacks Consensus Estimate of $3.9 billion.

For 2013, total revenue came in at $16.0 billion, up 3% year over year. Further, total revenue eclipsed the Zacks Consensus Estimate of $15.7 billion.

Net interest income (NII) was $2.3 billion, decreasing 7% year over year. The fall was mainly due to lower purchase accounting accretion and reduced core net interest income, which was driven by fall in yields on loans and securities, partially offset by lower rates paid on deposits and borrowed funds as well as loan growth. Moreover, net interest margin (NIM) decreased 47 basis points (bps) year over year to 3.38%.

Non-interest income increased 10% year over year to $1.8 billion. The rise was mainly due to the release of reserves for residential mortgage repurchase obligations in fourth-quarter 2013 as compared with the provision in the prior-year quarter. Strong growth in client fee income was driven by rise in asset management revenues, consumer service fees and service charges on deposits.

Further, the company's non-interest expense was $2.5 billion, down 10% from the prior-year quarter. The fall reflected disciplined expense management through all verticals and lower expenses for residential mortgage foreclosure-related matters, which was partly offset by higher legal accruals and a higher contribution to the PNC Foundation.

Credit Quality

PNC Financial's overall credit quality improved in the said quarter. Nonperforming assets fell 9% year over year to $3.5 billion due to improvement in commercial lending portfolios and other real estate owned and foreclosed assets. Nonperforming assets to total assets was 1.08% as of Dec 31, 2013, down 16 bps from the year-ago quarter.

Moreover, the allowance for loan and lease losses to total loans was 1.84% as of Dec 31, 2013, decreasing 33 bps from the prior-year quarter. Net charge-offs fell 39% year over year to $189 million. Additionally, provision for credit losses was $113 million, down 64% year over year.

Capital Position

PNC Financial's capital ratios also improved in the quarter. As of Dec 31, 2013, the company's Tier 1 common capital ratio was 10.5%, up from 9.6% as of Dec 31, 2012. This improvement came on the back of growth in retained earnings. Further, Tier 1 risk-based capital ratio was 12.4% as of Dec 31, 2013, up from 11.6% as of Dec 31, 2012.

The estimated pro forma Basel III Tier 1 common capital ratio was 9.4% as of Dec 31, 2013 against 8.7% as of Sep 30, 2013.

As of Dec 31, 2013, total assets under administration were $247 billion, up 10% from the prior-year quarter. Total loans were $195.6 billion, up 5% year over year. Further, total deposits increased 4% from the prior-year quarter to $220.9 billion.

Our Viewpoint

We believe that PNC Financial is well positioned to grow, given its diverse revenue mix, expense control measures, balance sheet strengthening efforts, improving credit quality, strategic acquisitions and steady capital levels. However, a protracted economic recovery, persistent low interest-rate environment and increased regulatory headwinds are likely to limit the company's profitability.

PNC Financial currently carries a Zacks Rank #3 (Hold).

Similar to PNC Financial, there are some other banks you may want to consider as our model shows these have the right combination of elements to post an earnings beat this season:

State Street Corp. ( STT ) has an earnings ESP of +1.68% and carries a Zacks Rank #3 (Hold). It is scheduled to report fourth-quarter results on Jan 24.

The earnings ESP for KeyCorp. ( KEY ) is +4.17% and it has a Zacks Rank #3. The company is expected to release fourth-quarter results on Jan 23.

The earnings ESP for Fifth Third Bancorp ( FITB ) is +2.38% and it holds a Zacks Rank #2 (Buy). The company is expected to release fourth-quarter results on Jan 23.



FIFTH THIRD BK (FITB): Free Stock Analysis Report

KEYCORP NEW (KEY): Free Stock Analysis Report

PNC FINL SVC CP (PNC): Free Stock Analysis Report

STATE ST CORP (STT): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Business , Earnings , Stocks

Referenced Stocks: FITB , KEY , NIM , PNC , STT

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