PNC Financial Services Group, Inc. (PNC) reported a solid 1.34% return-on-asset (ROA) during the fourth quarter of 2013 (4Q'13), according to Fitch Ratings. PNC's results benefitted from a release from mortgage repurchase reserves, lower provision expenses, and a modest improvement in spread income. However, these gains were partially offset by higher expenses.

The release of mortgage repurchase reserves was from previously disclosed agreements with both Fannie Mae and Freddie Mac during the quarter, resolving repurchase obligations related to loans sold between 2000 and 2008. Fitch views these settlements favorably as it addresses a great deal of legacy mortgage-related risk. With regard to core mortgage results, mortgage originations fell 32% on linked-quarter basis. While better than other banks reporting to date, the decrease for PNC was still expected given the drop-off in refinancing activities.

PNC also reported a large increase in its estimated Tier 1 common ratio (CET1) under Basel III, an estimated 9.4% CET1 ratio at year-end 2013, up 70 basis points (bps) from prior quarter-end. PNC attributed the increase to lower deductions from quantitative limits and improved AOCI from changes related to pension assets, offset by an increase in risk-weighted assets. Fitch views the improvement favorably as it places PNC's capital ratios much closer to peer averages. Further, the company is well above its current guideline of between 8% and 8.5%, likely paving the way for a higher capital request under 2014 CCAR than the year before.

PNC reported a modest increase in spread income and a significant increase in noninterest income, primarily due to the aforementioned mortgage repurchase reserve release. Excluding this release, noninterest income was flat on a sequential basis.

Lower mortgage revenues from smaller net hedging gains on mortgage servicing rights were offset primarily by higher asset management revenues, driven by stronger equity markets and growth. Also impacting linked-quarter comparisons, PNC reported an $85 million pre-tax gain on the sale of Visa shares in 3Q'13.

PNC reported a 5% increase in noninterest expenses from higher incentive compensation, a $50 million contribution to PNC Foundation, and higher legal accruals, including the previously disclosed residential mortgage fair lending joint settlement with the CFPB and DOJ. This fine related to legacy National City Bank activities. Legal-related charges continue to weigh on results for the large banks, though at much smaller level for PNC and the other large regional banks in comparison to the money center banks.

PNC reported a 9bps decline in the net interest margin due to higher balances of interest-bearing deposits at banks in anticipation of new regulatory requirements, namely the October 2013 Liquidity Coverage Ratio (LCR) proposal. PNC has not publicly disclosed its estimate of the LCR.

Excluding the impact of purchase accounting accretion on the net interest margin (NIM), PNC's core NIM declined 7bps on a linked-quarter basis to 3.10%, which is likely somewhat below the average for the large regional banks.

Credit quality continues to generally improve for PNC, and the company reported still low net charge-offs (NCOs) of just 39 bps during 4Q'13. PNC's NCOs can be a bit lumpy from quarter-to-quarter, ranging from 39 bps this quarter to 99 bps in 1Q'13. Reported nonaccrual assets also declined 4% on a sequential basis. Quarterly earnings benefitted from a loan loss reserve release with NCOs exceeding provision expenses, though at only 5% of pre-tax income, it is not considered to be a driver of quarterly earnings growth.

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