April 13, 2017 / 8:48 PM / in 8 months

Fitch: PNC Reports Solid 1Q17 Performance

(The following statement was released by the rating agency) CHICAGO, April 13 (Fitch) PNC Financial Services Group, Inc. (PNC) reported $1 billion in first quarter 2017 net income, up 2.6% on a linked-quarter basis, for an ROAA of 1.19%. Fitch Ratings considers these results solid, particularly in light of still low interest rates and sluggish economic growth. PNC reported an increase in spread income and lower expenses. Offsetting this, PNC reported higher provision expenses and a decline in non-interest income. Net interest income improved 1.4% on a linked-quarter basis reflecting higher asset yields, partially offset by increased borrowing and deposit costs, and the lower day count in the quarter. PNC reported a sizeable 8 basis point (bps) increase in the net interest margin to 2.77% during the quarter, primarily due to higher short-term rates. PNC expects two more increases to the Fed Funds rate, with the long-end of the curve remains relatively stable. Consumer deposit betas have not moved much according to the company, though PNC disclosed that commercial deposit betas are closer to 40%. PNC indicated that the somewhat unexpected March 2017 rate hike is worth around $150 million in incremental full-year net interest income, or around 1.7% of 1Q17 annualized spread income. Similar to some peers, PNC also reported a sizeable increase in cash balances, up 7.5% on a linked-quarter basis, while securities were relatively flat. PNC disclosed they did extend the duration of the balance sheet, but by using interest rate swaps, as opposed to increased securities purchases. PNC also increased bank borrowings given attractive pricing in the market during the quarter. PNC's loans increased nearly 1% on a linked-quarter basis, primarily in C&I lending. The broad-based commercial loan growth appears counter to general industry trends, and was done with improving yields. The average commercial yield increased to 3.24% during the quarter, as compared to 3.11% in 4Q16. PNC also reported continued declines in home equity and in the run-off student lending book; partially offset by higher mortgage, auto, and credit card loans. Non-interest income decreased 1% on a linked-quarter basis as seasonally lower fee income was only partially offset by $47 million in positive valuation adjustments, following a five-year extension to conform certain equity investments subject to the Volcker Rule. Non-interest expenses declined 1.6% on a sequential basis reflecting continued expenses management and the absence of last quarter's charitable contribution. PNC indicated it is on target to deliver $350 million of cost savings in 2018. Savings are being partially used to fund the ongoing investments in the business, which include modernizing its core technology and business infrastructure and transforming the retail banking and home lending experience. Credit quality remains benign with just 23bps of NCOs, while non-performing loans decreased 7% from the prior quarter. PNC's provision expense increased on a linked-quarter basis though PNC still released $30 million in reserves. The results reflect the recently completed SNC examination. PNC also disclosed that in terms of its $8 billion retail-related exposure, it has around $1 billion in loan outstandings directly to department, apparel, and general merchandise stores, of which $300 million is both non-investment grade and non-asset based. PNC reported its estimated fully phased-in Common Equity Tier 1 ratio (CET1) -- under Basel III standardized approach rules -- was a solid 10%, unchanged from the prior quarter. This reflects retained earnings growth, offset by capital distributions and higher risk-weighted assets. In January, PNC announced a $300 million increase to its planned share repurchases, to be completed by June 30, 2017, which is in addition to the $2 billion requested as part of last year's CCAR. PNC reiterated its full-year 2017 guidance with mid-single digit loan growth, revenue growth in upper end of mid-single digits (revised upwards given the March rate hike), and non-interest expenses growth in low-single digit range. This guidance reflects its April acquisition of the commercial and vendor finance business of ECN Capital Corp., which should be "nominal" to the full-year results. Contact: Julie Solar Senior Director +1-312-368-5472 Fitch Ratings, Inc. 70 West Madison Street Chicago, IL 60602 Justin Fuller Senior Director +1-212-908-2057 . Media Relations: Alyssa Castelli, New York, Tel: +1 (212) 908 0540, Email: alyssa.castelli@fitchratings.com; Elizabeth Fogerty, New York, Tel: +1 (212) 908 0526, Email: elizabeth.fogerty@fitchratings.com. 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