Business context and reporting period
The PNC Financial Services Group, Inc. is a diversified U.S. financial institution with Retail Banking, Corporate & Institutional Banking, and Asset Management Group businesses. This unaudited Form 10-Q covers the three months ended March 31, 2022. Results include BBVA, acquired in June 2021; the first-quarter 2021 comparison predates that acquisition and is therefore not fully comparable.
Key financial results
| Metric | Q1 2022 | Comparison |
|---|---|---|
| Total revenue | $4.692 billion | Up 11% year over year; down 8% from Q4 2021 |
| Net interest income (GAAP) | $2.804 billion | Up 19% year over year; down 2% sequentially |
| Net interest margin | 2.28% | Up 1 basis point year over year and sequentially |
| Noninterest income | $1.888 billion | Up 1% year over year; down 17% sequentially |
| Provision for credit losses | Benefit of $208 million | Benefit of $551 million in Q1 2021 and $327 million in Q4 2021 |
| Noninterest expense | $3.172 billion | Up 23% year over year; down 16% sequentially |
| Net income | $1.429 billion; $3.23 diluted EPS | Down 22% year over year; up 9% sequentially |
| Efficiency ratio | 68% | 61% in Q1 2021; 74% in Q4 2021 |
| Return on average assets | 1.05% | 1.58% in Q1 2021; 0.93% in Q4 2021 |
Year-over-year revenue and net interest income growth reflected BBVA and higher interest-earning assets. Earnings declined year over year primarily because expenses rose and the credit-loss benefit was smaller. Sequential earnings improved mainly due to lower integration costs and expenses. Noninterest income fell sequentially, notably in capital markets, private equity and commercial mortgage banking.
Balance sheet, cash flow, capital and liquidity
- At March 31, 2022, total assets were $541.2 billion, down 3% from year-end 2021; loans were $294.5 billion, up 2%; and deposits were $450.2 billion, down 2%.
- Commercial loans rose 3% sequentially to $198.3 billion, driven by new production and greater utilization of commitments, partly offset by PPP forgiveness. Consumer loans were $96.2 billion. PPP loans outstanding fell to $1.8 billion from $3.4 billion.
- Borrowed funds declined 14% sequentially to $26.6 billion. Shareholders’ equity fell $6.5 billion to $49.2 billion, principally reflecting a $6.1 billion after-tax decline in AOCI, share repurchases and dividends, partly offset by net income.
- Q1 cash flows were $989 million used in operating activities, $12.707 billion provided by investing activities and $12.150 billion used in financing activities. Investing cash flow included a $25.474 billion net decrease in interest-earning deposits with banks; cash flows reflect balance-sheet movements and should not be read as conventional free cash flow.
- CET1 was 9.9% under the transitional CECL framework (9.7% estimated fully implemented). PNC reported that it and PNC Bank exceeded the 100% minimum LCR and NSFR. Liquid assets totaled $59.9 billion in cash and short-term investments plus $112.3 billion in available-for-sale securities; $96.2 billion of unused secured borrowing capacity was available.
- PNC returned $1.7 billion to shareholders in Q1: $1.2 billion of common share repurchases and $0.5 billion of common dividends. The Board raised the quarterly common dividend to $1.50 per share effective with the May 2022 payment.
Material changes, outlook and risks
- Credit indicators improved sequentially: nonperforming assets declined 7% to $2.324 billion; total accruing loans past due declined 14% to $1.699 billion. Net charge-offs were $137 million, or 0.19% of average loans, versus $124 million, or 0.17%, in Q4 2021. The loan-related allowance for credit losses was $5.197 billion, or 1.76% of loans, down from $5.530 billion, or 1.92%, at year-end.
- Rising rates drove substantial unrealized securities losses and AOCI pressure. PNC transferred $18.7 billion of securities from available-for-sale to held-to-maturity on March 31 to reduce future AOCI and tangible-capital volatility. After quarter-end, it transferred an additional $50.2 billion on May 3. These transfers do not eliminate the economic effects of rate changes; disclosed unrealized losses are to be amortized into yield over the securities’ remaining lives.
- Management’s Q2 2022 versus Q1 outlook: average loans up 2%–3%, net interest income up 10%–12%, noninterest income (excluding securities gains and Visa activity) up 6%–8%, revenue up 9%–11%, expenses up 3%–5%, and net charge-offs of $125–$175 million. For full-year 2022 versus 2021, it expects average loans up about 10%, period-end loans up about 5%, revenue up 9%–11%, expenses excluding integration costs up 4%–6%, and a 19% effective tax rate.
- Management cited inflation, supply-chain and labor constraints, the Russia-Ukraine conflict, faster-than-expected Federal Reserve tightening and increased recession risk as uncertainties. Its interest-rate simulations indicated that a 100-basis-point increase would raise first-year net interest income by 4.6%, while a yield-curve flattening scenario reduced modeled NII by 1.3% in year one and 4.3% in year two.
- PNC identified continued uncertainty in commercial real estate office exposure as remote work affects demand; it reported no notable performance deterioration at quarter-end. Other risk areas include consumer effects from inflation and fading stimulus, BBVA integration, cyber and operational risks, regulatory change, and the LIBOR transition.
- For disclosed legal matters where losses could be estimated, PNC said reasonably possible losses in excess of accrued liabilities were less than $300 million in aggregate; this estimate excludes matters for which losses could not be estimated and is not a maximum exposure. The USAA patent cases remained active, with a trial date reset for May 9, 2022. PNC also disclosed an April issuance of Series U preferred shares and a planned $750 million bank-note redemption.
Important facts for investors to verify
- Whether loan growth, deposit trends and the Q2 net interest income outlook are supported by actual subsequent results as rates and funding costs change.
- How much of reported earnings depends on credit-reserve releases, and whether credit quality and charge-offs remain consistent with the current allowance and economic assumptions.
- The impact of the securities transfers, unrealized losses and AOCI on tangible capital, liquidity and future yields, including the post-quarter $50.2 billion transfer.
- Capital headroom and the sustainability of repurchases and the higher dividend under applicable stress-capital-buffer and regulatory constraints.
- Developments in office and other commercial real estate credit, BBVA integration, legal proceedings and the macroeconomic risks management identified.