PNC FINANCIAL SERVICES GROUP, INC. annual report, FY2015

Vollständiges Dokument

PNC Financial Services Group, Inc. — 2015 Form 10-K

Business context and reporting period. PNC is a diversified U.S. financial services company with retail banking, corporate and institutional banking, asset management, residential mortgage banking, an equity investment in BlackRock, and a non-strategic assets portfolio. This filing covers the fiscal year ended December 31, 2015; fourth-quarter comparisons below are year over year.

Financial performance and position

  • Full-year earnings and revenue: Net income was $4.143 billion, down 2% from $4.207 billion; net income attributable to common shareholders was $3.881 billion. Diluted EPS rose to $7.39 from $7.30. Revenue declined 1% to $15.225 billion.
  • Interest income and margins: Net interest income fell 3% to $8.278 billion, and net interest margin declined to 2.74% from 3.08%. PNC cited lower purchase-accounting accretion, lower asset yields, and the cost of a larger liquidity position.
  • Fees, expenses, and credit costs: Noninterest income increased 1% to $6.947 billion, led by asset management, consumer services, and corporate services; residential mortgage revenue declined. Noninterest expense edged down to $9.463 billion. Provision for credit losses decreased to $255 million from $273 million.
  • Fourth quarter: Net income was $1.022 billion versus $1.057 billion in fourth-quarter 2014; diluted EPS was $1.87 versus $1.84. Revenue was $3.853 billion versus $3.947 billion, and provision for credit losses was $74 million versus $52 million.
  • Balance sheet and funding: Year-end assets were $358.5 billion, up 4%; loans were $206.7 billion, up 1%; deposits were $249.0 billion, up 7%; and investment securities were $70.5 billion, up 26%. Borrowed funds were $54.5 billion, down 4%. The loans-to-deposits ratio was 83%.
  • Capital and liquidity: Shareholders’ equity was $44.7 billion. The transitional Basel III CET1 ratio was 10.6% (10.9% in 2014); estimated fully phased-in CET1 was 10.0%. PNC and PNC Bank’s liquidity coverage ratios exceeded 100% at year-end, above the 80% 2015 minimum. Parent-company available liquidity was $4.6 billion.
  • Cash flows: Consolidated cash flow statement reported $5.496 billion provided by operating activities, $16.260 billion used in investing activities, and $10.469 billion provided by financing activities. Year-end cash and due from banks was $4.065 billion.
  • Asset quality: Nonperforming assets declined 16% to $2.425 billion, or 0.68% of assets. Net charge-offs were $386 million, or 0.19% of average loans, versus $531 million and 0.27% in 2014. The allowance for loan and lease losses was $2.727 billion, or 1.32% of loans.

Material changes versus 2014

  • Annual net interest income fell $247 million as net interest margin compressed, despite growth in commercial lending and securities.
  • Deposits grew $16.8 billion; securities increased $14.7 billion. Commercial lending increased $5.2 billion, while consumer lending declined $3.3 billion.
  • Retail Banking earnings rose to $907 million from $728 million. Corporate & Institutional Banking earnings declined to $2.031 billion from $2.106 billion; Residential Mortgage Banking earnings declined to $26 million from $35 million.
  • PNC repurchased 22.3 million common shares for $2.1 billion, raised its quarterly dividend to $0.51 per share, and redeemed $500 million of Series K preferred stock.

Outlook, commentary, risks, and unusual items

  • 2016 outlook: Management expected modest full-year revenue growth and stable full-year noninterest expense. It expected first-quarter net interest income to be stable versus fourth-quarter 2015, purchase-accounting accretion to decline about $175 million year over year, and first-quarter provision for credit losses of $75 million to $125 million. The energy portfolio could put provision toward the high end. PNC set a $400 million 2016 cost-savings goal and expected an effective tax rate of 25%–26%.
  • Management priorities: Grow customer relationships, loans, deposits and fee income; reshape retail banking toward digital and lower-cost channels; invest in technology and infrastructure; control expenses; and maintain capital and liquidity while returning excess capital subject to regulatory approval.
  • Principal risks: Low rates and uncertain rate paths could pressure margins; market volatility, economic weakness and low commodity prices could affect borrowers and markets. Other material risks include credit concentrations, especially real estate and energy, regulatory and capital requirements, cybersecurity and technology disruptions, competition, and legal and mortgage-related contingencies.
  • Energy exposure: Oil and gas loans totaled $2.6 billion at year-end, including approximately $0.7 billion to energy and production companies. Management said reserves reflected the continued decline in oil and gas prices; deterioration in the sector was noted in fourth-quarter commercial nonperforming assets.
  • Legal matters: PNC estimated reasonably possible losses above accrued liabilities of up to approximately $550 million for disclosed matters it could estimate; this is not a maximum exposure and excludes matters it could not estimate. A jury judgment in the pre-need funeral trust case was reduced to $289 million and appealed. Mortgage, interchange, and other regulatory matters remain ongoing.
  • Unusual accounting item: A supervisory-directed change in the derecognition policy for purchased impaired pooled consumer and residential real estate loans reduced recorded loans and the allowance by $468 million each at year-end. PNC said the change had no net carrying-value or provision impact and was immaterial to the financial statements as a whole.
  • Audit and controls: The auditor issued an unqualified opinion on the financial statements and internal control over financial reporting; management reported effective controls and no material fourth-quarter control change.

Important facts for investors to verify

  1. Whether margin compression and the expected $175 million decline in purchase-accounting accretion are offset by loan growth, fee income, and deposit pricing.
  2. Whether commercial real estate and energy credit performance worsens, and how provisions, charge-offs, and reserve coverage respond.
  3. How the $468 million purchased-impaired-loan accounting change affects interpretation of year-over-year loan, allowance, and credit-quality ratios.
  4. Whether PNC sustains capital and liquidity buffers while executing share repurchases and dividends under CCAR and evolving Basel III requirements.
  5. The status and potential financial effects of the $289 million appealed pre-need trust judgment, mortgage-related claims, and other legal matters.