CHICAGO–(BUSINESS WIRE)–PNC Financial Services Group, Inc. (PNC) reported $943 million in net income, down 8% on a linked-quarter basis for the first quarter 2016 (1Q16). According to Fitch Ratings, results were impacted by energy-related expenses, weaker equity markets, and lower capital markets activity. This was partially offset by stability in spread income and disciplined expense management
Energy-related exposure drove a large increase in provision expenses, essentially doubling during the quarter. Of the $152m provision for the quarter, $80 million was for energy, evenly split between O&G and Coal. Despite this, net charge-offs (NCOs) remained very low at just 29bps in 1Q16. We note that NCOs at this level are likely unsustainable for the company and the industry, though Fitch notes PNC’s NCOs over the past 10 years are both lower and less volatile than large regional bank peers. PNC has indicated in the past that its through-the-cycle loss expectations are between 50bps and 60bps.
PNC exposure to the energy sector is on the lower end of the large bank universe. At March 31, 2016, PNC reported $2.7 billion of oil and gas outstandings, up 4% from prior quarter-end due to a slight uptick in utilizations. PNC noted that its utilization rate in the O&G book has remained relatively constant over the past five quarters, hovering around a relatively low 34%. Total energy, inclusive of O&G and Coal, represents just 1.6% of total loans, with 5% reserve coverage which incorporated the recently completed Shared National Credit review. PNC also disclosed roughly $500 million of coal-funded loans, with associated reserves of 15%. Oil, gas and coal NCOs were $25 million during the quarter, or 3.7% on an annualized basis.
Energy-related non-performing loans (NPLs) increased to $301 million at March 31, 2016, up significantly from the prior quarter-end, and more than offset declines in other loan categories.
Spread income was fairly flat for the quarter on higher loan and securities balances, as well as higher loan yields. PNC’s balance of interest-bearing deposits with banks dropped considerably during the quarter as PNC reinvested these monies into higher yielding assets. The drop in Fed balances helped boost the net interest margin (NIM) by 5bps to 2.75% during the quarter. PNC is expecting two rate hikes this year, one at the end of the year, which will provide little uplift to this year’s earnings. Last quarter, the company expected three rate hikes.
Non-interest income declined 11% on a linked-quarter basis due primarily to weaker equity markets, lower capital markets activity and seasonality. PNC reported sequential declines across all categories. Despite this, PNC is expecting a significant 10% to 12% increase in fee income next quarter, some of which will come from better results from BlackRock, which had an episodic-oriented first quarter, according to PNC. Secondly, PNC expects improved performance in the corporate services segment given strong pipelines, and lastly, some of the growth will come from consumer services.
Non-interest expenses declined 5% on a linked-quarter basis due to lower business activity supported by seasonality and weaker markets. The quarter also benefitted from lower personnel expenses. PNC indicated that a portion of the targeted cost savings will be redeployed into technology and business infrastructure investments.
PNC reported its estimated fully phased-in Common Equity Tier 1 ratio (CET1) under Basel III standardized approach rules was a solid 10.1%, up roughly 15bps from the prior quarter. Its payout ratio under the current CCAR repurchase program from 2Q15 through 1Q16 was 85%. PNC continues to see more value in returning capital to shareholders than via bank M&A.
PNC also disclosed that its estimated pro forma Liquidity Coverage Ratio was in excess of 100% at both the consolidated and bank levels at quarter-end, above the phased-in requirement of 90% on Jan. 1, 2016.
Additional information is available at ‘www.fitchratings.com’.