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| Home -> Archives -> Reggie Middleton -> For Those That Didn't Notice - Reggie Middleton on PNCl Q3-09 Results |
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October 27, 2009 For Those That Didn't Notice - Reggie Middleton on PNCl Q3-09 Results |
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PNC has reported strong accounting earnings for Q3-09 and lower charge-offs as well as lower 90 day lates. The press and the blogs were all over it as a news search in Google reveals:
As a result their share jumped more than 10%.
But, and there is always a but, if we look at the bigger picture things really don't look so rosy...
As a matter of fact, if anyone really bothered to look at the numbers offered (not even the real 10Q numbers, but the numbers offered in the conference call), one would realize that there was no real improvement in asset quality, despite lower charge-offs. As a matter of fact, asset quality AND loan quality got worse, not better - both quarter over quarter and year over year!!! This was the crux of the share price collapse in PNC to begin with. What the hell is wrong with those charged with analyzing these companies??? The BoomBustBlog PNC Financial Results Review - 3Q09 PNC Financial Services (PNC) reported strong earnings growth in 3Q2009 primarily off lower loan provisioning for loan losses and lower non-interest expenses. Lower provision for losses despite a substantial rise in non-performing assets, and contracting interest earning assets (which declined 3.1% q-o-q in 3Q2009- at the sharpest rate among all leading banks which have reported their 3Q2009 earnings till date) raise concerns over sustainability of continuing growth in returns to shareholders in the near-to-medium term. PNC reported 3Q2009 net profit per diluted share of $1.0 compared with net profit per diluted share of $0.14 per share in 2Q09, well ahead of both our and consensus estimates.From an operational standpoint, they outperformed our estimates - kudos to management! PNC's total net revenues increased 1.5% q-o-q to around $4,048 million in 3Q09 compared with $3,987 million in 2Q09. Non-interest income increased 1.2% q-o-q to $1,826 million in 3Q09 primarily due to growth in asset management fees (up 16.3% q-o-q to $242 million) and other income (up 5.7% q-o-q to $314 million) partially offset by reduction in mortgage fees which decreased 15.5% q-o-q to $207 million off lower loan refinancing volumes. In 3Q09, non-interest revenues accounted for 45.1% of the total net revenues against 45.3% and 39.5% in 2Q09 and 3Q08, respectively. Net interest income increased 1.8% q-o-q to $2,222 million in 3Q09 compared with $2,182 million in 2Q09 off higher net interest margin (NIM) which increased 16bps q-o-q to 3.76% in 3Q09 compared with 3.60% in 2Q09. The growth in NIM was primarily due to interest rate on deposit which declined from 1.25% in 2Q09 to 1.04% at the end of 3Q09. This positive impact was offset by decline in average earning assets, down a significant 3.1% q-o-q to $243.2 billion in 3Q09 compared with $235.7 billion in 2Q09. The management forecasts a flat net interest income for 4Q09 (compared with 3Q09) due to marginal improvement in NIM off benefit from re-pricing of its high interest rates on deposits. In 3Q-09 PNC's net charge-offs declined to $650 million (down 18.2% q-o-q) or 1.59% of average loans on an annualized basis compared with $795 million, or 1.89% of average loans in 2Q09. Nevertheless, nonperforming assets (NPAs) grew 19.1% q-o-q to $5.6 billion or 3.50% of total loans as of September 30, 2009 led by increase in nonperforming commercial loans (up 26.2% q-o-q) and residential real estate loans (up 40.4% q-o-q) in 3Q09.
Non-interest expenses declined 10.5% q-o-q to $2,379 million in 3Q09 compared with $2,658 million in 2Q09 primarily due to lower acquisition and integration costs (non-recurring), reversal of $66 million of an indemnification charge related to Visa litigation (non-recurring), and FDIC assessment of $133 million in the 2Q09 (will probably recur over several quarters). PNC realized cost savings of around $200 million in 3Q09 off its acquisition of National City Corporation (NCC), in line with the Company's two years goal of reducing annualized non-interest expenses by $1.2 billion. Consequently, the Bank's efficiency ratio improved considerably by 790 basis points q-o-q to 58.8% in 3Q09 as compared to 66.7% and 68.4% in 2Q09 and 3Q08, respectively. Net income available to common shareholders were $467 million in 3Q09 compared with meager $65 million in 2Q09. Asset Quality - No real improvement seen despite lower charge-offs PNC's credit losses shrunk in 3Q09, with gross charge-offs declining to $738 million (annualized charge-off rate of 1.8%) in 3Q09 from $881 million (annualized charge off rate of 2.1%) in 2Q09, while the provisions for loan losses totalled $914 million in 3Q09 (annualized rate of 2.3%) against $1,087 million (annualized rate of 2.6%) in 2Q09.
However, nonperforming loans increased significantly to $5,126 million (3.19% of total loans) at the end of 3Q09 from $4,156 million (2.52% of total loans) at the end of 2Q09 and remained comparatively high when compared with $841 million (1.12% of total loans) at the end of 3Q08. Total non-performing assets also increased to $5,644 million (3.51% of total loans) in 3Q09 compared with $4,656 million (2.82% of total loans) at the end of 2Q09. However, the 90 days past due loans declined to $875 million at the end of 3Q09 from $1,043 million at the end of 2Q09. The surge in tangible equity and contraction in 90 days past due loans led to moderate decline in Texas ratio to 50.0% in 3Q09 against 51.7% in 2Q09. This is, however, considerably higher compared to 19.9% in 3Q08.
Loans and Deposits - continuing to contract in 3Q2009 In 3Q09, PNC's total loan portfolio declined to $162.0 billion at the end of 3Q09 from $168.9 billion in 2Q09. The decline in loans was driven by 8.0% decrease in commercial, 3.6% decline in commercial real estate, and a relatively modest decline in consumer loans, owing to tough lending and credit environment. Further, the total deposits also declined to $183.8 billion in 3Q09 from $190.4 billion in 2Q09 primarily on the back of divestiture of its 61 branches (and $4.1 billion of deposits and $800 million of loans) in September 2009. Consequently, the loan-to-deposit ratio increased 73bps q-o-q to 87.4% at the end of 3Q09 compared with 86.6% in 2Q09.
Tier 1 capital In 3Q09, tier 1 common ratio and tier 1 risk-based capital ratio improved 20bps and 30bps q-o-q to 5.5% and 10.8%, respectively, largely owing to the increase in retained earnings and decline in risk weighted assets. At this point, our forensic research on PNC still stands sans the surprisingly positive EPS performance from the quarter. Asset quality and the potential for significant future loan losses still loom ahead. Subscribers can download the following analysis history. There is a free public option at the bottom. I would also like to note that I have re=opened the monthly retail subscription option and will start allowing analysts to interact (on a limited basis) with professional subscribers in the discussion and comment forums.
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Reggie
Middleton
Well, I fancy myself the personification of the free thinking maverick, the ultimate non-conformist as it applies to investment and analysis. I am definitively outside the box - not your typical or stereotypical Wall Street investor. I work out of my home, not a Manhattan office. I build my own technology and perform my own research - in lieu of buying it or following the crowd. I create and follow my own macro strategies and am by definition, a contrarian to the nth degree. Since I use my research as a tool for my own investing to actually put food on my table, I can stand behind it as doing what it is supposed too - educate, illustrate and elucidate. I do not sell advice, I am not a reporter hence do not sell stories, and I do not sell research. I am an entrepreneur who exists just outside of mainstream corporate America and Wall Street. This allows me freedom to do things that many can not. For instance, I pride myself on developing some of the highest quality research available, regardless of price. No conflicts of interest, no corporate politics, no special favors. Just the hard truth as I have found it - and believe me, my team and I do find it! I welcome any and all to peruse my blog, use my custom hacked collaborative social tools, read the articles, download the files, and make a critical comparison of the opinion referencing the situation at hand and the time stamp on the blog post to the reality both at the time of the post and the present. Hopefully, you will be as impressed with the Boom Bust as I am and our constituency. I pay for significant information and data, and am well aware of the value of quality research. I find most currently available research lacking, in both quality and quantity. The reason why I had to create my own research staff was due to my dissatisfaction with what was currently available - to both individuals and institutions. So here I am, creating my own research for my own investment activity. What really sets my actions apart is that I offer much of what I produce to the public without charge - free to distribute and redistribute, as long as it is left unaltered and full attribution is given to the author and owner. Why would I do such a thing when others easily charge 5 and 6 digits annually for what some may consider a lesser product? It is akin to open source analysis! My ideas and implementations are actually improved and fine tuned when bounced off of the collective intellect of the many, in lieu of that of the few - no matter how smart those few may believe themselves to be. Very recently, I have started charging for the forensics portion of my work, which has freed up the resources to develop the site to deliver even more research for free, particularly on the global macro and opinion front. This move has allowed me to serve an more diverse constituency, which now includes the institutional consumer (ie., investment turned consumer banks, hedge funds, pensions, etc,) as well as the newbie individual investor who is just getting started - basically the two polar opposites of the investing spectrum. I am proud to announce major banks as paying clients, and brand new investors who take my book recommendations and opinions on true wealth and success to heart. So, this is how I use my background and knowledge in new media, distributed computing, risk management, insurance, financial engineering, real estate, corporate valuation and financial analysis to pursue, analyze and capitalize on global macroeconomic opportunities. I have included a more in depth bio at the bottom of the page for those who really, really need to know more about me. Visit his blog Boom Bust Blog. Copyright © 2007-2009 Reggie Middleton Image rendition and html coding Copyright © 2000-2009 SafeHaven.com ADVERTISEMENTS
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