PNC Financial Services Group, Inc. — 2019 Third-Quarter Form 10-Q
Business context and reporting period
PNC is a diversified U.S. financial services company with Retail Banking, Corporate & Institutional Banking, Asset Management Group and a 22% economic interest in BlackRock. This unaudited report covers the three and nine months ended September 30, 2019; balance-sheet changes are generally compared with December 31, 2018.
Financial results and key metrics
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Total revenue | $4.493 billion | $4.357 billion | $13.218 billion | $12.792 billion |
| Net interest income (GAAP) | $2.504 billion | $2.466 billion | $7.477 billion | $7.240 billion |
| Provision for credit losses | $183 million | $88 million | $552 million | $260 million |
| Noninterest expense | $2.623 billion | $2.608 billion | $7.812 billion | $7.719 billion |
| Net income | $1.392 billion | $1.400 billion | $4.037 billion | $3.995 billion |
| Diluted EPS | $2.94 | $2.82 | $8.42 | $7.96 |
| Net interest margin | 2.84% | 2.99% | 2.91% | 2.95% |
Third-quarter net income fell 1% year over year despite 3% revenue growth, as higher credit-loss provisions and expenses offset revenue gains. Diluted EPS increased, reflecting fewer average shares after repurchases. Nine-month net income rose 1%. Q3 noninterest income increased 5% to $1.989 billion, supported by consumer services, residential mortgage and other income; asset-management income declined. The efficiency ratio improved to 58% from 60% in Q3 2018. Q3 return on average assets was 1.36% (1.47% prior year), and return on average common equity was 11.56% (12.32% prior year).
At September 30, 2019, total assets were $408.9 billion, loans $237.4 billion and deposits $285.6 billion. Versus year-end 2018, loans grew 5%, deposits 7%, and borrowed funds 7% to $61.4 billion. Loans-to-deposits were 83%. Shareholders’ equity was $49.4 billion; common book value per share was $103.37. Basel III standardized ratios were 9.6% CET1, 10.7% Tier 1, 12.7% total capital, 9.3% leverage and 7.8% supplementary leverage. PNC and PNC Bank were described as well capitalized.
For the first nine months, operating cash flow was $4.248 billion, investing cash flow was $(20.725) billion and financing cash flow was $16.540 billion; cash and due from banks increased $63 million. These flows were substantially affected by banking balance-sheet activity, including loan growth, deposits and securities transactions. The filing reports $26.3 billion of short-term investments and $69.1 billion of available-for-sale securities as liquid assets; PNC’s and PNC Bank’s liquidity coverage ratios exceeded the 100% regulatory minimum, but no specific ratio is stated here.
Material changes versus comparable periods
- Average loans grew 6% year over year in Q3, led by commercial lending; average interest-bearing deposits rose 11%. Higher loan balances and yields supported net interest income, but increased funding costs contributed to lower net interest margin.
- Q3 net charge-offs increased to $155 million, or 0.26% of average loans annualized, from $91 million, or 0.16%, in Q3 2018. The allowance for loan and lease losses was $2.738 billion, 1.15% of loans versus 1.16% at year-end 2018.
- Nonperforming assets were $1.847 billion, up $39 million from year-end; nonperforming loans were 0.73% of loans, down from 0.75%. Total accruing delinquencies fell 9% to $1.348 billion.
- Q3 capital returns were $1.5 billion: $1.0 billion of repurchases and $0.5 billion of common dividends. Nine-month returns totaled $3.9 billion. Common shares outstanding declined to 439 million from 457 million at year-end.
- Nine-month segment earnings were $936 million for Retail Banking (up 25%), $1.799 billion for Corporate & Institutional Banking (down 3%), $171 million for Asset Management Group (up 7%) and $597 million for BlackRock (down 2%).
Outlook, commentary, risks and unusual items
- For Q4 2019 versus Q3, management expected average loans up approximately 1%, net interest income down approximately 1%, fee income stable to up 1%, other noninterest income of $300–$350 million excluding specified securities and Visa-related activity, provision of $175–$225 million, and noninterest expense up approximately 1%. Full-year effective tax rate was expected to be approximately 17%.
- Management expected U.S. growth to slow further into 2020 and identified global growth, trade restrictions and geopolitical concerns as increased downside risks. Its baseline incorporated a 0.25% federal funds rate cut on October 30, 2019, with the rate expected to remain at 1.50%–1.75% through year-end.
- PNC said it was on track to achieve $300 million in 2019 cost savings through continuous improvement. Regulatory tailoring rules were expected to take effect for PNC no later than Q1 2020 and could reduce certain capital deductions and liquidity requirements; management was evaluating potential use of any additional capital capacity. Capital distributions remain subject to regulatory processes.
- PNC planned to adopt CECL on January 1, 2020. Based on September 30 balances and forecasts, it estimated an approximately 20% increase in the aggregate allowance for credit losses versus current reserves, with consumer reserves expected to rise significantly and commercial reserves to decline slightly. The estimate remained subject to model and process refinements and economic assumptions.
- Other notable items: the sale of the retirement recordkeeping business contributed to year-to-date results; PNC agreed to divest components of its PNC Capital Advisors investment-management business, with closing expected in Q4 2019. Mortgage servicing rights fell to $1.483 billion from $1.983 billion at year-end, with market-driven valuation changes a contributor.
- Legal proceedings: for certain disclosed matters where estimates were possible, PNC estimated reasonably possible losses in excess of related accruals, if any, of less than $100 million in aggregate. This estimate excludes matters it could not estimate and is not a maximum exposure; the filing cautions ultimate losses could be higher.
- Key risks include economic and interest-rate changes, credit deterioration, market and liquidity conditions, regulatory and legal developments, cyber and operational risks, and the planned LIBOR transition. The filing reported no material changes to risk factors from the 2018 Form 10-K.
Most important facts for investors to verify
- Whether loan and deposit growth can continue to offset funding-cost pressure and declining net interest margin.
- Trends in consumer and commercial credit losses, criticized loans, delinquency and reserve needs, especially ahead of CECL adoption.
- Q4 results against management’s stated ranges and expectations, including the impacts of lower rates and mortgage servicing valuations.
- Actual effects of regulatory tailoring on capital requirements and PNC’s capacity for dividends or repurchases.
- Completion and financial impact of the planned investment-management divestiture, and the scope of legal exposures not included in the stated loss estimate.