Fitch: PNC's Results in Line with Expectations
The tax benefits were primarily attributable to settling acquired entity tax contingencies, while last quarter's results included an usually large \\$30 million trust settlement, which typically run more in the range of low millions.
Excluding the impact of purchase accounting accretion (PAA) on the net interest margin (NIM), PNC's core NIM declined 2 basis points (bps) on a linked-quarter basis to 2.57%, well below the average for the large regional banks. PNC now expects that full-year PAA will be between \\$180 million to \\$200 million lower in 2015, as compared to 2014. PAA contributed \\$583 million to spread income last year or approximately 7% of net interest income.
Although PNC's margin remains under pressure and below peer levels, PNC has good revenue diversity, with noninterest income comprising a healthy 45% of reported revenues in the third quarter of 2015 (3Q15), insulating the company from the impacts of the low interest rate environment on bank margins.
Spread income was fairly flat, while noninterest income declined 6% sequentially reflecting higher second quarter gains on asset sales and lower asset management revenues related to the aforementioned trust settlement. In 3Q15 quarter, PNC reported gains of \\$43 million on the sale of its Visa shares, as compared to \\$79 million last quarter.
Noninterest expenses decreased 1% on a linked-quarter basis due primarily to lower third party services expenses, partially offset by an increase in the cost of medical benefits.
PNC reported lower period-end loan balances at quarter-end on a linked-quarter basis, with increases only in CRE period-end and commercial real estate related balances. This was offset by broad-based declines in other commercial categories, as well as all categories in consumer lending, except cards.
PNC noted that ongoing capital and liquidity management activities contributed to some of the decline in loan balances, as the company trims certain liquidity coverage ratio (LCR) and capital-unfriendly exposures. Fitch notes that PNC has reported relatively modest growth relative to peers as of late, which is viewed prudent amidst a very competitive lending environment.
Securities increased a significant 11% from the quarter-end, largely funded by deposit growth. The growth in the securities portfolio was primarily in LCR-friendly securities. Despite the increase in securities, PNC's duration of equity became more negative, given the lower rate environment. PNC now expects the Federal Reserve to raise the Fed Funds rate in December, though that is far from certain.
The credit environment remains quite benign. While net charge-offs (NCOs) increased, they remained very low at just 19 bps in 3Q15. 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 50 bps and 60 bps.
PNC disclosed that they would derecognize a portion of its purchased impaired consumer loans next quarter. The impact will reduce total loan balances and reserves for loan losses by \\$475 million. There will be no additional provision expense, though there will be a large one-time spike in NCOs. Holding everything constant, the decline in reserves and loans would equal an approximate 23 bps decline in reserves to roughly 1.4% of loans, still considered adequate in the context of PNC's historical loan loss experience.
PNC exposure to the energy sector is manageable. At Sept. 30, 2015, PNC reported \\$2.6 billion of oil and gas outstandings. This represents just 1.3% of total loans. Similar to peers reporting to date, PNC noted the most pressure is to its oilfield services portfolio, which totals approximately \\$900 million, particularly the \\$225 million of non-investment grade or not asset-based loans. Given that portfolio deterioration and elevated NCOs, PNC increased loan loss reserves.
PNC reported its estimated fully phased-in Common Equity Tier 1 ratio (CET1) under Basel III standardized approach rules was 10.1%, essentially unchanged from the prior quarter. PNC also disclosed that its estimated pro forma LCR 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.