PNC Poised For Strong Third Quarter

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PNC Financial Services Group reported net income of $1.1 billion, or $1.99 per diluted share, for second quarter 2013 compared with $1.0 billion or $1.76 per diluted share for first quarter 2013. There were some one-time items, including securities gains ($61 million), gains on sale of Visa V stock ($83 million), and lower loss provision due to the better than expected improvement in commercial credit quality. However, PNC expects the provision to return to higher levels ranging from $170 million to $250 million in the near term. When all of these one-time items are backed out, diluted EPS approximated $1.77.

Loan growth increased slightly to 7.0% annualized for the quarter and 5.1% over the last year. Net interest income was lower in second quarter 2013 due to lower asset yields. Nonperforming loans decreased during second quarter 2013 and represented 1.75% of total loans. Net interest margin declined to 3.58% for second quarter 2013 compared with 3.81% for first quarter 2013 largely due to lower asset yields resulting from the low interest rate environment during the quarter.

On the funding side, deposits grew only slightly at 1.2% annualized over the last quarter. Nevertheless, overall cost of funding remains very low at 0.48%. Credit performance continued to show improvement with nonperforming loans decreasing to 1.75% of total loans compared with 1.83% for first quarter 2013.

The improved credit quality allowed PNC to modestly release additional loan loss provisions. Net loan loss provisions equaled $157 million for the quarter compared with $236 million for first this low provision and anticipate higher provisions ranging from $170 million to $250 million next quarter.

At this point, we expect nonperforming loans to decrease as the overall economy slowly improves. PNC consolidated an additional 78 branches during the quarter on top of the 30 branches the firm consolidated during the prior quarter. At this point, it remains on target to consolidate 200 branches, which we expect to reduce expenses and improve the efficiency ratio.

The efficiency ratio approximated 60% for the quarter compared with 73% a year ago. PNC’s pro forma fully loaded Basel III Tier 1 common equity/ risk weighted capital is 8.0%. Given PNC’s stronger performance, we think the bank will continue to meet all regulatory capital requirements. Overall, we are generally pleased with PNC’s quarterly results.

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