PNC Financial Services Group, Inc. — Q1 2021 Form 10-Q
Business context and reporting period
For the three months ended March 31, 2021, PNC reported results from Retail Banking, Corporate & Institutional Banking, and Asset Management Group. BlackRock results are excluded from continuing operations following PNC’s 2020 divestiture of its entire investment.
Financial results and condition
| Metric | Q1 2021 | Q1 2020 or comparison |
|---|---|---|
| Total revenue | $4.22 billion | $4.34 billion; down 3% |
| Net interest income (GAAP) | $2.35 billion | $2.51 billion; down 6% |
| Net interest margin | 2.27% | 2.84% |
| Noninterest income | $1.87 billion | $1.83 billion; up 3% |
| Provision for (recapture of) credit losses | $(551) million recapture | $914 million provision |
| Noninterest expense | $2.57 billion | $2.54 billion; up 1% |
| Continuing-operations net income | $1.83 billion; diluted EPS $4.10 | $759 million; diluted EPS $1.59 |
| Net income attributable to common shareholders | $1.76 billion | $844 million |
| Operating cash flow | $780 million | $(696) million |
Continuing-operations earnings rose primarily because of the credit-loss provision recapture, reflecting a more favorable economic outlook and lower loans outstanding. Q1 2020 included $156 million of net income from discontinued BlackRock operations. The efficiency ratio was 61%, versus 59%; return on average common equity was 14.31%, versus 7.51%.
At March 31, 2021, assets were $474.4 billion, up 2% from year-end 2020. Loans were $237.0 billion, down 2%, while deposits rose 3% to $375.1 billion. Investment securities increased 11% to $98.3 billion; borrowed funds fell 11% to $33.0 billion. Loans-to-deposits were 63%, compared with 66% at year-end. Shareholders’ equity was $53.8 billion; book value per common share was $118.47.
Credit quality improved from year-end: nonperforming assets declined 7% to $2.18 billion; annualized net charge-offs were 0.25% of average loans, versus 0.37% in Q4 2020; and the allowance for credit losses on loans and unfunded commitments was $5.2 billion, or 2.20% of loans, versus $5.9 billion, or 2.46%. The CET1 ratio was 12.6% (12.3% fully implemented for CECL). PNC reported that its liquidity coverage ratio exceeded the 100% regulatory minimum. Liquid assets included $96.0 billion of cash and short-term investments and $96.8 billion of available-for-sale securities.
Material changes and management commentary
- Net interest margin was pressured by low yields on loans and securities and elevated Federal Reserve balances, partly offset by lower deposit and borrowing costs. Average interest-earning deposits at banks rose substantially year over year as customer deposits grew.
- Deposit growth reflected customer liquidity and government stimulus payments. Loans declined amid softer commercial demand, lower commitment utilization, and consumer paydowns; PPP loans totaled $14.0 billion at quarter-end.
- Noninterest income increased, with stronger asset management, corporate services, and other revenue offsetting lower residential mortgage revenue and deposit service charges. Personnel costs rose, partly offset by lower travel and marketing costs.
- Common dividends paid were $493 million; the quarterly dividend remained $1.15 per share. PNC suspended share repurchases ahead of the pending BBVA acquisition and expected to resume them in the second half of 2021, subject to conditions and regulatory limits.
Outlook, risks and unusual items
For Q2 2021 versus Q1, PNC expected average loans to be stable, net interest income to rise about 2%, fee income to rise 3%–5%, other noninterest income of $300–$350 million, noninterest expense to be stable, and net loan charge-offs of $150–$200 million. For standalone 2021, excluding BBVA-related one-time costs, it expected average loans down about 3%–4%, revenue and noninterest expense stable, and a 17% effective tax rate.
PNC’s pending all-cash BBVA USA acquisition had a fixed purchase price of $11.6 billion and was expected to close in mid-2021, subject to customary conditions and regulatory approvals. PNC estimated the deal would add approximately $102 billion of assets, $86 billion of deposits, and $66 billion of loans, and contribute about $700 million to 2021 pre-tax, pre-provision net revenue, excluding integration costs.
Management forecast U.S. GDP returning to its pre-pandemic level in Q3 2021 and employment in the second half of 2022, with the federal funds rate expected to remain at 0.00%–0.25% until at least late 2023. It cautioned that uncertainty remains around pandemic-sensitive commercial sectors and consumer payment behavior after stimulus and hardship relief ease. A hypothetical severe adverse economic scenario would increase the allowance by an estimated $2.0 billion before qualitative adjustments; management said this was not its expected scenario.
Other material considerations include interest-rate and market risk, the ongoing LIBOR transition, potential effects of COVID-19 on borrowers, regulatory restrictions on capital distributions, and risks to BBVA deal completion and integration. PNC disclosed that estimable reasonably possible legal losses in excess of accruals for certain disclosed matters were, in aggregate, less than $100 million; this estimate excludes matters that could not be estimated and is not a maximum-loss estimate. Rates also reduced first-quarter other comprehensive income by $1.48 billion after tax, primarily through securities and cash-flow hedge valuations.
Important facts for investors to verify
- Whether the BBVA transaction closed on schedule, its final financing and integration costs, and realized earnings benefits.
- Whether revenue and net interest income meet management’s outlook as rates, deposit balances, and loan demand change.
- Whether credit-loss reserves and charge-offs remain appropriate as stimulus and borrower relief programs unwind, particularly in pandemic-affected industries.
- Capital and liquidity levels after the acquisition, regulatory restrictions on dividends and repurchases, and the sustainability of the $1.15 quarterly dividend.
- Potential legal and regulatory exposures beyond disclosed accruals, including the matters for which losses cannot currently be estimated.