PNC Financial Services beats 1Q2015 earnings but misses on revenue

PNC Financial Services reported first quarter earnings on April 15^th, 2015. EPS for the quarter came in at $1.75, beating estimates of $1.71 per share, for an earnings surprise of 2.3%. First quarter revenue was $3.73 billion against estimates of $3.75 billion and down 1% year over year. Revenue in the first quarter was mainly driven by strong performance in the Retail Banking segment, exhibiting very strong evidence of our investment thesis.

The results were mainly driven by a fall in the provision in credit losses and increases in noninterest income, however partially offset by higher expenses and lower net interest income. Noninterest income and expenses came in at $1.66 billion (+5% YoY) and $2.35 billion (+4% YoY), respectively. Higher expenses were due mainly to investments in bank infrastructure and technology for its banking transformation initiative. Also, the company is about 30% complete with its goal of reducing costs for 2015 by $400 million. Net interest income for the quarter fell to $2.07 billion, down 6% from the previous year. PNC’s net interest margin fell 44 bps to 2.82% year over year.

PNC’s ability to source cheap funds and expand its balance sheet during the quarter should pay off when interest rates begin to rise. Loans grew 3% and deposits grew 6% compared to the previous quarter, despite the tough interest rate environment. Credit quality improved significantly YoY: Provision for credit losses were down 43% to $54 million, while net charge offs fell by about the same percentage to $103 million.

Overall, a decent performance for PNC despite missing on revenue. The performance supports our investment thesis of higher noninterest income and lower expenses, with modest loan growth. This combined with stronger credit qualities and a strong focus on customer satisfaction should pay off for PNC in the long run. PNC has traded down around 2.5% to $90.93 since earnings were reported.