Fitch: PNC's 4Q'12 Earnings Performance Still Noisy on Mortgage-Related
CHICAGO -- January 17, 2013
PNC Financial Services Group, Inc. (PNC) once again reported noisy earnings
results in the fourth quarter 2012 (4Q'12), according to Fitch Ratings. The
company reported net income of $719 million for the quarter which included
several material mortgage-related charges and one-time gains. Fitch notes that
PNC's reported earnings follow a pattern of noisy results throughout 2012,
expect that 2013 performance should be more reflective of core performance.
PNC reported nearly $400 million in mortgage-related charges in 4Q'12. The
company's provision for residential mortgage loan repurchase obligations
totaled $254 million during the quarter. The provision was up significantly
from the prior quarter; this reflects further changes in GSE behavior,
according to PNC, particularly in extending review periods back to 2004 and
2005 mortgage vintages. While Fitch views the relatively outsized provision as
sufficient to cover PNC's current pipeline, further behavioral changes by the
GSEs could force the company to take additional charges as it did this last
quarter and just two quarters ago with a $438 million provision. Given the
ongoing and volatile nature of the charges, Fitch did not exclude this item as
a one-time measure.
PNC also recorded a goodwill impairment charge of $45 million in the
residential mortgage banking segment, leaving this business line with no
goodwill remaining. Further, the company recorded a $70 million charge to
settle the Independent Foreclosure Reviews, similar to others subject to the
April 2011 Consent Order. As a result of the settlement, management expects
residential mortgage foreclosure-related compliance expenses to decrease
substantially in 2013.
Other notable charges taken during 4Q'12 included $35 million in integration
costs and $70 million related to the redemption of hybrid capital securities.
To offset these charges, PNC realized a pre-tax gain of $130 million on the
sale of Visa stock following a $137 million gain in 3Q'12. Omitting the impact
the gains on sales of Visa securities in both quarters, noninterest income
fell by $37 million or 2.38% on a sequential basis. The decline would have
been greater had PNC not benefitted from a healthy quarter in corporate
services and commercial mortgage banking. Excluding integration costs, the
goodwill impairment, and trust preferred securities redemption costs, core
non-interest expenses declined approximately 4%.
Counter to industry trends of continuing margin compression for many banks,
PNC reported NIM improvement of 3bps sequentially given higher cash recoveries
on purchase impaired loans. However, excluding purchase accounting accretion
(PAA), the core NIM was 3.42%, relatively flat compared to 3Q'12 at 3.43%.
Fitch would expect PNC's core NIM to remain steady going forward at its
current level but notes management's guidance that total net interest income
will likely fall 2%-3% due to a decline in PAA.
Similar to 3Q'12, asset quality metrics were somewhat distorted by the
adoption of the OCC guidance pertaining to borrowers discharged from
bankruptcy. Related to this guidance, PNC reported $45 million in NCOs in
4Q'12 and $83 million in related NCOs last quarter. Excluding these items,
NCOs actually increased 7% sequentially but remain very manageable and below
other large regional banks at only 67bps during the quarter.
PNC saw a decline in reported NPAs during the quarter, primarily driven by a
decrease in CRE and commercial-related NPLs. The decline was partially offset
by a larger inflow of consumer NPLs relating to the aforementioned OCC
guidance which resulted in $199m of additional TDRs in 4Q'12 ($112 million in
3Q'12), largely consisting of home equity and residential mortgage loans.
Even with improving asset quality metrics, PNC took a sequentially larger
provision in 4Q'12. Driving the $60 million incrementally higher provision was
a larger loan portfolio and reduced reserve release in commercial lending.
Fitch anticipates that reserve releases will continue to diminish in coming
quarters as credit metrics normalize and loan growth continues.
PNC's reported an estimated Tier 1 common ratio of 9.6% at year-end 2012, up
10bps on a sequential basis, and roughly in line with regional bank peer
averages. PNC disclosed its estimated Tier 1 common ratio of 7.3% under Basel
III. Though this ratio is somewhat below the average for other large regional
banks, Fitch views PNC's capital profile favorably given its overall risk
profile and earnings capacity.
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