PNC Misses but Margin Expansion Offers Hope (Update 1)

  • PNC reports second-quarter earnings of 98 cents a share, missing the consensus estimate of $1.24.
  • Second-quarter results include mortgage putback charges of $284 million, or 54 cents, and $119 million in other charges for trust preferred redemptions and merger integration expenses.
  • Net interest income grows 10% sequentially, reflecting a full quarter benefit the March 2 RBC Bank (USA) acquisition; net interest margin expands to 4.08%.

Updated with comment from Stifel Nicolaus analyst Christopher Mutascio and market close information.

NEW YORK ( TheStreet) -- PNC Financial Services Group ( PNC) of on Wednesday reported that its net interest margin during the second quarter expanded to 4.08% from 3.90% the previous quarter, and 3.93% a year earlier, running counter to the trend for most large regional banks in the prolonged low-rate environment.

The Pittsburgh lender reported a second-quarter net income of $546 million, or 98 cents a share, missing the consensus estimate of a profit of $1.24 a share, among analysts polled by Thomson Reuters.

The second-quarter results included a mortgage putback provision of $284 million, or 54 cents a share after tax, noncash charges of $85 million, or 16 cents a share, related to trust preferred share redemptions, and integration expenses of $34 million, or six cents a share, related to the acquisition of RBC Bank (USA) on March 2.

In comparison, PNC earned $811 million, or $1.44 a share, during the first quarter, and $912 million, or $1.67 a share, during the second quarter of 2011.

PNC's shares pulled back 1% to close at $61.01.

The company reported that its net interest income during the second quarter totaled $2.5 billion, increasing 10% from the previous quarter and reflecting a full quarter benefit from the RBC Bank (USA) acquisition, as well as the redemption of roughly $1.8 billion in trust preferred shares.

PNC said that excluding the mortgage putback provision, second-quarter noninterest income increased 4% sequentially.

PNC had $299.6 billion in total assets as of June 30. Total loans grew 2% during the second quarter, with commercial loans increasing by 3% to $104.1 billion, at the end of the second quarter, "as a result of strong loan growth primarily in corporate banking, real estate finance and asset-based lending," according to the company.

Total deposits grew slightly during the second quarter, to $206.9 billion, as of June 30.

The company estimated that its June 30 Tier 1 common equity ratio was 9.3% as of June 30, unchanged from the previous quarter, and said "{NC expects to reach its Basel III Tier 1 common capital ratio goal of 8.0 to 8.5 percent by year end 2013 without benefit of phase-ins, based on Basel III proposed rules and including application of Basel II and Basel II.5 rules."

CEO James Rohr said that the company's "results for the second quarter reflected strong operating performance in a challenging environment," adding that "while we experienced a few items that reduced our earnings in the short term, we were very pleased with our success in continuing to grow customer relationships and loans resulting in strong revenue," and that "we are excited about the opportunities we see in our newly acquired southeastern markets and across our entire franchise to drive long-term value."

PNC's shares have now returned 8% year-to-date, following a 27% decline during 2011.3

PNC Chart PNC data by YCharts

Based on a 40-cent quarterly payout, the shares have a dividend yield of 2.62%.

PNC's shares trade for nine times the consensus 2013 EPS estimate of $6.78. The consensus 2012 EPS estimate is $5.94.

Stifel Nicolaus analyst Christopher Mutascio rates PNC a "Buy," with a $74 price target, and said after the earnings announcement that if the mortgage repurchase charges and merger expenses were backed out, "we can arrive at a quarterly EPS run rate going forward of $1.74 assuming the company has fully accounted for higher loan repurchase demands/putbacks within the 2Q12 reserve build."

The analyst was impressed with PNC's net interest margin expansion, "easily exceeded our expectations of 3.87%," adding that "of the $235 million sequential quarter increase in net interest income, we estimate that one-third ($80 million) was derived from higher accretable yield) and two-thirds ($155 million) was driven by core margin expansion."

Mutascio estimates that "the company's core net interest margin (excluding accretable yield) increased 8-10 basis points during the quarter, which bucks the trend from the margin compression we have seen from most banks reporting 2Q12 results thus far."

Stifel Nicolaus estimates that PNC will earn $6.00 a share for all of 2012, followed by 2013 EPS of $6.90.

Mutascio said that his price target "represents 10.7x our 2013 EPS estimate of $6.90 and 1.5x our 4Q13 estimated tangible book value per share of $50.16, which we believe to be reasonable valuation metrics for a company that is generating above peer returns on average assets."

Interested in more on PNC? See TheStreet Ratings' report card for this stock.

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-- Written by Philip van Doorn in Jupiter, Fla.

>Contact by Email.

Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.

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