PNC Financial Services Group, Inc. (PNC) reported a solid 1.23% return on asset (ROA) during the fourth quarter of 2014 (4Q'14) and 1.28% for the full year. Quarterly earnings were supported by decent loan and deposit growth, growth in fee income, and a still benign credit environment. Fitch Ratings views the quarter's results as consistent with PNC's credit profile, with ratings that remain among some of the highest in the world. PNC's ratings are primarily supported by the consistency of performance over time.

PNC reported revenue growth of 3%, mainly attributable to the sale of its Washington DC regional headquarters building, and additional gains on the sales of VISA shares. PNC reported $36 million in VISA-related gains in 4Q'14, down from $57 million last quarter.

Excluding these two items, core noninterest income increased 2% on improved M&A advisory fees, partially offset on lower earnings on PNC's equity investment in BlackRock and a drop in mortgage results. At Dec. 31, 2014, PNC's economic interest in BlackRock was 22%.

While spread income fell slightly due to lower purchase accounting accretion (PAA), core net interest income increased 1%, supported by commercial loan growth, partially offset by continued pressure on loan yields and higher bank borrowings and senior notes used to enhance PNC's liquidity position.

Excluding the impact of PAA on the NIM, PNC's core NIM declined 6 bps on a linked-quarter basis to 2.72%, well below the average for the large regional banks. Although PNC's margin continues to compress and remains below peer levels, PNC has good revenue diversity, with noninterest income comprising a healthy 47% of reported revenues in 4Q'14, insulating the company somewhat from a very challenging interest rate environment.

Expenses ticked up 8% on a linked-quarter basis mainly reflective of a charitable contribution to the PNC Foundation, higher legal and residential and mortgage compliance costs, and increased fixed asset write-offs. Excluding the elevated expense items outlined above, core expenses rose 2%, in line with peers reporting to date. PNC expects that expenses may be down high single digits in 1Q'15 relative to 4Q'14.

The credit environment remains quite benign, and while NCOs increased 44% in nominal terms (reflecting higher recoveries last quarter), NCOs remained low at just 23bps in 4Q'14. However, Fitch notes that even with the uptick in credit losses, NCOs are likely at unsustainably low levels for the company and the industry. PNC indicated that its through the cycle loss expectations are between 50bps and 60bps.

With regard to energy exposure, PNC disclosed it has a total of $2.9bn in outstandings to the oil and gas sector, or approximately 2% of the total commercial lending portfolio. PNC also reported that just $300m in loans in its oil & gas services portfolio of $1.3 billion were to sub-investment grade borrowers.

PNC reported its estimated fully phased-in Tier 1 common ratio (CET1) under Basel III standardized approach rules fell 10bps to an estimated 10% CET1 at YE2014. The slight decline was due to growth in retained earnings, partially offset by growth in standardized approach risk-weighted assets. In Fitch's view, PNC, and its similarly-sized regional bank peers, will not be subject to any capital surcharge under the proposed rules announced in early December.

PNC also disclosed that its estimated pro forma Liquidity Coverage Ratio was 100% and 95% at the consolidated and bank levels, respectively, at year-end 2014. This more than exceeds the minimum phased-in requirement of 80%, which became effective for Advanced Approach banks on Jan. 1, 2015.

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