PNC Financial Services Group, Inc. — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. PNC is a diversified U.S. financial services company. Results include BBVA USA’s acquired businesses from June 1, 2021, affecting year-over-year comparability.
Financial performance and position
| Metric | Q2 2022 / June 30, 2022 | Comparison |
|---|---|---|
| Revenue | $5.116 billion | Up 9% from Q1 2022 and 10% from Q2 2021 |
| Net interest income; net interest margin | $3.051 billion; 2.50% | Income up 9% and margin up 22 basis points from Q1 |
| Noninterest income | $2.065 billion | Up 9% from Q1; down 1% from Q2 2021 |
| Provision for credit losses | $36 million | Versus a $208 million recapture in Q1 and $302 million provision in Q2 2021 |
| Noninterest expense | $3.244 billion | Up 2% from Q1 and 6% from Q2 2021 |
| Net income; diluted EPS | $1.496 billion; $3.39 | Net income up 5% from Q1 and 36% from Q2 2021 |
| Six-month net income; diluted EPS | $2.925 billion; $6.61 | Net income down $4 million from first-half 2021 |
| Efficiency ratio; return on average common equity | 63%; 13.52% | Quarterly efficiency improved from 68% in Q1; return was 11.64% in Q1 |
| Assets; loans; deposits | $540.8 billion; $310.8 billion; $440.8 billion | Since Dec. 31, 2021: assets down 3%, loans up 8%, deposits down 4% |
| Borrowed funds; shareholders’ equity | $36.0 billion; $47.7 billion | Since year-end, borrowed funds up 17%; equity down 14% |
| CET1 capital ratio | 9.6% | Down from 10.3% at year-end; PNC reported it remained well-capitalized |
For the first six months, operating cash flow was $1.643 billion, investing cash flow was $11.017 billion and financing cash flow was negative $12.082 billion. Investing cash flow included a $45.846 billion decrease in interest-earning deposits with banks; financing cash flow reflected deposit outflows, debt activity, repurchases and dividends.
PNC returned $1.4 billion to shareholders in Q2: $737 million of common share repurchases and $627 million of common dividends. The Board declared a $1.50-per-share dividend payable August 5, 2022.
Material changes and key drivers
- Q2 revenue and net income increased from Q1 as higher asset yields and loan balances lifted net interest income, while capital-markets fees supported noninterest income. These gains were partly offset by higher expenses and the shift from a Q1 credit-loss reserve recapture to a Q2 provision.
- First-half revenue rose 10% year over year, including a 19% increase in net interest income, while expenses rose 14%. BBVA contributed to both balance and expense growth. First-half net income was essentially flat.
- Loans grew $22.4 billion from year-end, led by commercial loans, up 10%. Deposits fell $16.5 billion amid outflows and seasonal declines; borrowed funds increased $5.2 billion.
- Credit indicators improved from year-end: nonperforming assets fell 17% to $2.075 billion, delinquencies declined 24% to $1.511 billion, and the loan-related allowance for credit losses fell to $5.143 billion, or 1.65% of loans. Q2 net charge-offs were $83 million, or 0.11% of average loans.
- Common equity fell as higher rates drove substantial unrealized losses in securities and swaps recorded in accumulated other comprehensive income (AOCI), alongside repurchases and dividends. AOCI declined $8.8 billion during the first half.
Outlook, risks and unusual items
- Q3 2022 versus Q2: PNC expected average loans up 1%–2%, net interest income up 10%–12%, noninterest income (excluding net securities gains and Visa activity) down 3%–5%, revenue up 4%–6%, expenses stable to up 1%, and net charge-offs of $125 million–$175 million.
- Full-year 2022 versus 2021: Expected average loans up approximately 13%, period-end loans up approximately 8%, revenue up 9%–11%, expenses excluding integration costs up 4%–6%, and an effective tax rate of approximately 19%.
- Management cited elevated uncertainty from inflation, supply-chain disruption, labor constraints, rising interest rates and the Russia-Ukraine conflict, with increased risk of recession in late 2022 or 2023. Its CECL scenarios assumed slower GDP growth and higher unemployment than at year-end 2021.
- PNC transferred $77.8 billion of securities at fair value from available-for-sale to held-to-maturity in the first half, recording $5.4 billion of pretax unrealized losses in AOCI related to transferred securities. Management said the transfers were intended to reduce future AOCI and tangible-capital volatility; the losses are amortized over the securities’ lives. An additional $5.0 billion transfer occurred July 28, after quarter-end.
- Liquidity Coverage and Net Stable Funding Ratios exceeded the 100% regulatory minimum. At June 30, liquid assets included $40.8 billion of cash and short-term investments and $53.0 billion of available-for-sale securities; unused secured borrowing capacity was $79.5 billion.
- A Texas jury found PNC Bank liable for willful patent infringement in a USAA case and awarded approximately $218 million; PNC’s equitable defenses remained pending. For disclosed legal matters with estimable possible losses, PNC reported possible losses in excess of accruals of less than $300 million in aggregate, while noting the estimate excludes some matters and is not a maximum exposure.
- Management identified uncertainty in commercial real estate office lending as remote work affects space demand, though it reported no notable change in performance. Proposed CRA changes and a proposed two-basis-point FDIC assessment increase could raise compliance or deposit-insurance costs if adopted.
Important facts for investors to verify
- Whether the Q3 and full-year outlook was achieved, especially the projected net interest income growth and expense trajectory.
- Deposit trends, funding costs and loan growth as interest rates rose; assess whether loan growth translates into sustainable margin and earnings gains.
- Credit performance and allowance adequacy under higher inflation, slower growth and possible recession, including commercial real estate office exposure.
- Capital effects of AOCI losses, securities transfers, regulatory capital transitions and planned shareholder distributions.
- Developments and potential financial impact in the USAA litigation and other legal proceedings.
- Comparability of year-over-year results given BBVA’s acquisition and integration, and the Q1 credit-loss recapture.