PNC 2015 Q3 Earnings; Street Reacts Negatively Despite Increase in Profits

PNC Financial Services reported Q3 earnings yesterday at 11:00 am. For the quarter ended September 30^th, PNC reported revenues of $3.78 billion and net income of $1.07 billion, translating to a Diluted EPS figure of $1.90 per share. This number is greater than the $1.88 of earnings per diluted share reported in Q2 of 2015 as well as the $1.79 per share reported in Q3 of 2014. However the quarterly revenue figure contracted on a Y/Y basis by ~2%, mainly caused by lower net interest income and lower non-interest income. The stock reacted unfavorably after earnings and traded down ~2% to $86.20 per share.

To provide more color to quarterly performance, net income in the Retail Banking and Other (including BlackRock) segments increased 45% and 20% respectively Y/Y. This was partially offset by decreases in net income in each of the Corporate & Institutional Banking, Asset Management, and Non-Strategic Assets Portfolio segments (8%, 4%, 17%). The Residential Mortgage Banking segment reported a net loss of $4 million which compares to net income of $12 in the prior quarter. Non-interest expenses remained stable at $2.35 billion from Q3 of the prior year, mainly driven by savings being reinvested in firm technology and infrastructure. Net interest income and net interest margin declined 2% and 31 bps to 2.67%, respectively, on a year over year basis.

Turning to the balance sheet, total loans increased ~3% Y/Y driven mainly by growth in commercial loans and large corporate/real estate lending. Investment securities were also up $2.6 billion (4% Q/Q) resulting largely from an 8% Y/Y increase in deposits. Provisions for loan losses increased 47% Y/Y and net charge-offs climbed 17% Y/Y.

Overall, I still believe PNC is in a solid position for growth. The company continues to show its ability increase profitability, despite the decreases in revenue and net interest figures. I think that the Street overreacted to the decline in revenues and net interest income, both of which have been compressed for most banks and will be boosted when the Fed raises rates. Additionally, PNC has also demonstrated its ability to grow loans and deposits while returning value to shareholders through dividends and share repurchases. We purchased 81 shares of PNC Financial Services at an average price of $94.47 per share and remain confident in our ~102.00 price target.