PNC Financial Lags Estimate - Analyst Blog


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PNC Financial Services Group Inc. 's ( PNC ) fourth-quarter 2011 earnings per share came in at 85 cents, significantly below the Zacks Consensus Estimate of $1.41. Results also compared unfavorably with earnings of $1.55 per share in the prior quarter and $1.50 in the year-ago quarter.

PNC Financial's results were impacted by subdued revenue levels. The company also incurred a couple of one-time charges in the quarter. Yet a substantial contraction in the provision for credit losses was on the upside.

Notably, PNC Financial's fourth quarter 2011 results included a 30 cent per share (after tax) impact from residential mortgage foreclosure-related expenses. In addition, the company experienced non-cash after-tax charge of 24 cents per share related to redemption of trust preferred securities.

For full year 2011, PNC Financial reported net income of $3.1 billion or $5.64 per share, down from net income of $3.4 billion or $5.74 per share. Results also fell short of the Zacks Consensus Estimate of $6.20 per share.

Total revenue for the quarter came in at $3.5 billion, flat sequentially and down 10.3% year over year. However, it was in line with the Zacks Consensus Estimate. The drop was primarily due to lower non-interest income.

For full year 2011, PNC Financial's revenue came in at $14.3 billion, down 5.6% year-over-year but in line with the Zacks Consensus Estimate.

Quarter in Detail

Net interest income for the reported quarter was $2.2 billion, up 1.1% sequentially and flat year over year. Growth in core net interest income and lower funding costs were mostly offset by a decrease in purchase accounting accretion including lower cash recoveries on impaired loans. Net interest margin dipped 3 basis points (bps) sequentially and 7 basis points year over year to 3.86%.

Non-interest income was down 1.4% sequentially and 20.1% year over year to $1.4 billion. The year-over-year decline was attributed to the impact of a gain realized in the prior year quarter related to the sale of a portion of PNC Financial's BlackRock shares, lower corporate service fees and the fourth quarter 2011 regulatory impact of lower interchange fees on debit card transactions.

Non-interest expense for the reported quarter came in at $2.7 billion, up 28.6% sequentially and 17.4% year over year. Results were impacted by residential mortgage foreclosure-related expenses primarily as a result of ongoing governmental matters, a non-cash charge related to redemption of trust preferred securities, and an increase in personnel expense.

Notably, PNC Financial expects non-interest expense for the first quarter of 2012 to return to third quarter 2011 levels excluding legal and regulatory-related contingencies and integration costs that may be incurred in first quarter 2012.

Credit Quality

Credit quality continued to improve in the quarter. Nonperforming assets declined 3% sequentially and 19% year-over-year to $4.2 billion. The sequential decrease was driven by lower commercial and commercial real estate nonperforming loans partially offset by an increase in home equity nonperforming loans. The ratio of non-performing assets to total assets decreased 6 bps and sequentially and 41 bps year over year to 1.53%.

Net charge-offs plunged to $327 million, or 0.83% of average loans on an annualized basis, from with $365 million, or 0.95%, in the prior quarter and $791 million, or 2.09%, in the year-ago quarter. The sequential fall reflects decrease in commercial loan net charge-offs and commercial real estate loan net charge-offs partially offset by an increase in residential real estate and other consumer loan net charge-offs.

The provision for credit losses during the quarter was $190 million, down 27.2% sequentially and 57.0% year-over-year. Results reflect by overall credit quality improvement and continued efforts to reduce exposure levels.

Capital Position

As of December 31, 2011, PNC Financial's Tier 1 common capital ratio was an estimated 10.3%, versus 10.5% as of September 30, 2011 and 9.8% as of December 31, 2010. The Tier 1 risk-based capital ratio was an estimated 12.6% as of December 31, 2011, compared with 13.1% in the prior quarter and 12.1% in the year ago quarter. The sequential declines in the Tier 1 common and Tier 1 risk-based capital ratios were due to higher risk-weighted assets.

As of December 31, 2011, total assets under administration were $210 billion, up from $202 billion in the prior quarter but slightly down $212 billion in the year-ago quarter.

Capital Deployment Update

The Board of Directors of PNC Financial declared a quarterly common stock cash dividend of 35 cents per share with a payment date of February 5, 2012.

PNC Financial did not repurchase shares in 2011. The share repurchase program, which does not bear a termination date, has been in effect since October 4, 2007 and has 25 million shares remaining.

PNC in Expansion Mode

In December 2011, PNC Financial received the regulatory approvals to acquire RBC Bank ( USA ), the U.S. retail banking subsidiary of Royal Bank of Canada ( RY ). The approvals take PNC Financial a step closer to the completion of the deal, slated for the first quarter of 2012. The acquisition is expected to be accretive to 2012 earnings, excluding integration costs and the company has no plan to issue any shares of common stock as part of the purchase price.

The acquisition would help PNC Financial to expand its footprint in the Southeast markets. It would also make PNC Financial the fifth among U.S. banks, with 2,870 branches.

Of late, PNC Financial also completed acquiring the 27-branch retail bank franchise in Georgia from Flagstar Bank, a subsidiary of Flagstar Bancorp Inc. ( FBC ). Flagstar Bank sold the leases associated with the branches and the associated businesses and retail deposits worth approximately $210 million at the closing.  The deal is a strategic fit for PNC Financial as it will expand operations in Atlanta and give it a competitive advantage.

In mid-2011, PNC Financial also completed the acquisition of 19 branches from a subsidiary of BankAtlantic Bancorp Inc. ( BBX ). Additionally, two related facilities in the Tampa - St. Petersburg area and associated deposits were also handed over to PNC as part of the sale.

Our Take

PNC Financial's continued strengthening of balance sheet, with focus on risk and expense management, should propel its earnings ahead. Benefits from the 2008 National City acquisition continue to exceed the company's expectations. We also believe that the company's latest acquisition spree would be accretive to its revenue.

Yet, the top-line headwind is expected to remain in the near term, with continued soft demand for loans and a low interest rate environment. Regulatory issues also remain a concern.

Additionally, PNC Financial shares maintain a Zacks #3 Rank, which translates into a short-term Hold recommendation.

BANKATLANTIC -A ( BBX ): Free Stock Analysis Report
FLAGSTAR BANCP ( FBC ): Free Stock Analysis Report
PNC FINL SVC CP ( PNC ): 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 Nasdaq, Inc.

This article appears in: Investing , Business , Stocks
Referenced Stocks: BBX , FBC , PNC , RY , USA

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