PNC Financial Services Group, Inc. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. PNC is a diversified U.S. financial institution with Retail Banking, Corporate & Institutional Banking, and Asset Management businesses. Figures are unaudited; dollar amounts are in U.S. dollars.
Financial performance
| Metric | Q2 2023 | Comparison |
|---|---|---|
| Net interest income | $3.51 billion | Down 2% from Q1 2023; up 15% from Q2 2022 |
| Noninterest income | $1.78 billion | Down 12% from Q1 and 14% from Q2 2022 |
| Total revenue | $5.29 billion | Down 6% from Q1; up 3% from Q2 2022 |
| Provision for credit losses | $146 million | Versus $235 million in Q1 and $36 million in Q2 2022 |
| Noninterest expense | $3.37 billion | Up 2% from Q1 and 4% from Q2 2022 |
| Net income | $1.50 billion | Down 11% from Q1; approximately flat versus Q2 2022 |
| Diluted EPS | $3.36 | Versus $3.98 in Q1 and $3.39 in Q2 2022 |
| Net interest margin | 2.79% | Down 5 basis points from Q1; up 29 basis points from Q2 2022 |
For the first six months, revenue was $10.90 billion, up 11% year over year; net income was $3.19 billion, up 9%, and diluted EPS was $7.34 versus $6.61. Higher net interest income drove the improvement, partly offset by lower noninterest income, higher credit provision and expenses. The six-month efficiency ratio was 61%, versus 65% in the prior-year period.
Q2 noninterest income fell sequentially on lower private-equity revenue, mortgage servicing rights valuation net of hedges, and market-sensitive revenue. Negative Visa Class B derivative fair-value adjustments were $83 million in Q2, versus $45 million in Q1. Q2 expenses increased mainly from seasonal marketing and the full-quarter effect of merit increases.
Balance sheet, credit, liquidity and capital
- At June 30, total assets were $558.2 billion. Loans were $321.8 billion, down 1% from year-end 2022; deposits were $427.5 billion, down 2%; and borrowed funds were $65.4 billion, up 11%.
- Commercial loans declined $5.1 billion from year-end, while consumer loans increased $828 million. Noninterest-bearing deposits fell 11%; management cited seasonal declines, Federal Reserve quantitative tightening and customer shifts to interest-bearing products.
- Q2 net charge-offs were $194 million, or 0.24% of average loans. Nonperforming assets were $1.95 billion, down 3% from year-end; accruing loans past due were $1.21 billion, down 19%. The loan-related allowance for credit losses was $5.4 billion, or 1.68% of loans.
- Commercial real estate office exposure was $8.7 billion, or 2.7% of total loans, plus $0.4 billion of unfunded commitments. Within office loans, 3.3% were nonperforming and 22.5% were criticized; no office loans were 30 or more days delinquent. PNC identified office lending as an area of continuing uncertainty.
- Common equity Tier 1 was 9.5% (estimated 9.4% fully implemented for CECL). Average Q2 liquidity coverage ratio was 109%; both LCR and net stable funding ratio remained above their 100% regulatory minimums. Contingent liquidity sources totaled $227.3 billion; parent-company available liquidity was $17.2 billion.
- Uninsured deposits were approximately 46% of total deposits. Shareholders’ equity was $49.3 billion; PNC returned $0.7 billion to shareholders in Q2 through common dividends and repurchases. The Board raised the quarterly common dividend to $1.55 per share on July 3, 2023.
For the six months ended June 30, operating cash flow was $5.13 billion, investing cash flow was negative $3.40 billion, and financing cash flow was negative $2.58 billion. Cash and restricted cash decreased $852 million to $6.19 billion. These cash-flow movements reflect banking balance-sheet activity and should be considered alongside PNC’s broader liquidity disclosures.
Outlook, risks and unusual items
- Q3 2023 versus Q2: PNC expected average loans to decline about 1%; net interest income to fall 3%–4%; noninterest income, excluding net securities gains and Visa activity, to rise 10%–11%; revenue to increase about 1%; noninterest expense, excluding the proposed FDIC special assessment, to be stable; and net loan charge-offs of $200 million–$250 million.
- Full-year 2023 versus 2022: Expected period-end loans stable, average loans up 5%–6%, net interest income up 5%–6%, revenue up 2%–2.5%, and noninterest income excluding securities gains and Visa activity down 2%–4%. Expense excluding the proposed FDIC assessment was expected to rise about 2%; the expected effective tax rate was approximately 18%.
- Management’s baseline economic outlook anticipated a mild recession beginning in late 2023 or early 2024, with real GDP contraction of less than 1%, and expected the federal funds rate to remain at 5.25%–5.50% through March 2024. The outlook is sensitive to economic conditions, rates, deposit competition and credit performance.
- The proposed FDIC special assessment was estimated to cost PNC approximately $468 million pre-tax ($370 million after tax), subject to change and finalization. PNC expected recognition in the quarter the rule is finalized; the proposal contemplated collections beginning after Q1 2024.
- Regulators proposed expanded Basel III capital rules in July 2023. PNC’s initial assessment was that the proposal would lower pro forma capital ratios but leave them above current minimums and buffers; the proposal was not final. PNC also said repurchases might be lower in Q3 while it evaluated the proposal.
- PNC reported $4.4 billion of gross unrealized losses on available-for-sale securities and $9.5 billion of accumulated other comprehensive loss at June 30. Management said it did not intend, and expected not to be required, to sell the relevant securities before recovery of amortized cost. These securities valuation and interest-rate exposures remain important to monitor.
- For disclosed legal matters where loss estimates were available, PNC estimated reasonably possible losses in excess of accrued liabilities of less than $300 million in aggregate; the estimate excludes some matters and is not a maximum exposure estimate.
Most important facts for investors to verify
- Whether deposit pricing and funding costs continue to pressure net interest income and margin, and whether management’s Q3 and full-year outlook is achieved.
- Deposit balances and composition, including uninsured deposits, and the cost and availability of wholesale funding.
- Credit trends, especially office and other commercial real estate exposure, criticized loans, charge-offs and allowance adequacy as economic conditions evolve.
- The final FDIC assessment amount and timing, and the effect of proposed capital rules on capital ratios, dividends and share repurchases.
- Realization of securities values and AOCI, and outcomes of legal proceedings and other contingencies.