PNC Financial Services Group, Inc. (PNC) reported lackluster results in second-quarter 2012 (2Q'12), affected by several large one-time items. Excluding the non-core items, PNC's earnings benefitted from solid revenue growth, somewhat offset by an unexpected increase in provisions expenses and higher non-interest expenses.
Earnings were affected by integration costs related to last quarter's acquisition of RBC Bank (USA), charges related to the redemption of trust preferred securities (TRUPs), and a significant increase in mortgage repurchase expenses. Excluding the integration costs, which should wane over time, and the TRUPs redemption charges, PNC would still have reported a solid return on assets (ROA) of approximately 1% in 2Q'12, even with the significant mortgage repurchase provision.
PNC's provision for residential mortgage loan repurchase obligations totaled $438 million in 2Q'12, compared with just $32 million last quarter and $21 million a year ago. PNC expects to experience elevated levels of repurchase demands from the GSEs, reflecting a change in behavior and demand patterns, primarily related to loans sold in 2006 through 2008. Although the repurchase provision in 2Q'12 was well outside of Fitch's expectations for run-rate repurchase costs and had a material impact on 2Q'12 results, PNC's Rating Outlook remains Stable, as PNC's earnings profile is expected to still remain above peer averages over the long term.
Spread income showed good improvement sequentially, driven by the full-quarter benefit of the RBC Bank (USA) acquisition. The margin advanced to a strong 4.08% in the quarter, up 18 basis points (bps) sequentially, driven by higher yielding loans acquired from RBC Bank (USA). PNC reported 2% loan growth, essentially in line with other banks that have reported thus far.
Excluding the mortgage repurchase provision, non-interest income was 4% higher on a sequential basis, supported by strong underlying revenue growth in consumer and corporate services. Core non-interest expenses increased 2% on a sequential basis (excluding integration and operating costs related to RBC Bank (USA) and the charge related to the TRUPs redemptions in 2Q'12). Expenses were higher due to higher occupancy and equipment expenses.
Although PNC reported continued improvement in asset quality, with a 4% sequential decline in non-performing assets (NPAs) and net charge-offs (NCOs) of just 71bps in 2Q'12, provision expenses were $256 million in 2Q'12, up 38% from a quarter ago. This increase was counter to trends for peers, and related to deterioration post- acquisition of RBC Bank (USA)'s legacy loan book and increasing provisioning in the consumer runoff portfolio.
PNC reported an estimated Tier 1 common ratio of 9.3% at June 30, 2012, flat on a sequential basis, and in line with regional bank peer averages. PNC estimates its pro forma Basel III Tier 1 common ratios to be between 8% and 8.5% by year-end 2013. Fitch views this level of capital as acceptable in light of PNC's risk profile and earnings track record and capacity.
Fitch affirmed PNC in June in recognition of its solid earnings and capital levels, strong liquidity profile, and manageable asset quality deterioration to date. Fitch's rating action incorporated ongoing earnings pressure from various sources including mortgage repurchase costs (including 2Q'12's substantial charge), litigation accruals, and regulatory related costs, all affecting PNC's overall return metrics.
Additional information is available at 'www.fitchratings.com'.
Brian Bertsch, +1-212-908-0549
Media Relations, New York
Julie Solar, +1-312-368-5472
70 West Madison Street
Chicago, IL 60602
Justin Fuller, +1-212-908-2057