PNC Financial Services Group Inc. (PNC:US), the seventh-largest U.S. bank by deposits, declined in New York trading after second-quarter profit missed analysts’ estimates and mortgage-repurchase demands intensified.
Shares of the bank dropped 0.9 percent to $61.01 in New York trading at 4 p.m., after Pittsburgh-based PNC said net income fell 40 percent. Per-share earnings excluding one-time items other than the mortgage costs were $1.20, two cents less than the average estimate of 22 analysts surveyed (PNC:US) by Bloomberg.
PNC, led by Chief Executive Officer Jim Rohr, said earnings were reduced by a $438 million pretax provision related to demands by Fannie Mae and Freddie Mac that the bank buy back faulty mortgages sold during the housing boom. The company said the two government-sponsored enterprises had stepped up demands for so-called putbacks, especially in the past three months.
“We believe we are appropriately reserved,” Chief Financial Officer Richard Johnson said on a conference call with analysts. “However, we also believe it is reasonably possible that we could see an additional $350 million, over time, should investor behavior and our assumptions change.”
The new provision brings expected losses on the loan portfolio to $1.7 billion, Johnson said.
The higher claims, which apply mostly to loans sold in 2006 through 2008, were tied to National City Corp., which PNC acquired in 2009.
“It’s been an industry issue that just kind of pops out of left field,”Scott Siefers, an analyst at Sandler O’Niell & Partners LP in New York, said in an interview. “It’s not a problem, and then it is a problem. And it’s a problem that costs hundreds of millions of dollars in a lot of cases.”
PNC said last month it would boost reserves by $350 million to cover what the GSEs demanded at that time. Talks with the two companies resulted in the higher amount announced today, the bank said.
Net income dropped to $546 million, or 98 cents a share, from $912 million, or $1.67, a year earlier, the bank said today in a statement.
“While we experienced a few items that reduced our earnings in the short term, we were very pleased with our success in continuing to grow customer relationships and loans resulting in strong revenue,” Rohr, 63, said in the statement.
Revenue increased 1 percent to $3.62 billion, including a 17 percent climb in net interest income to $2.53 billion.
The company maintained its previous forecast that revenue percentage gains this year will be in the “high single digits,” assuming no significant future putback demands, according to a presentation on the bank’s website.
PNC’s residential-mortgage business posted a loss of $213 million on provisions for the repurchase demands.
In addition to the mortgage provision, the company also had a non-cash charge of $85 million, or 16 cents a share, from the redemption of trust-preferred securities.
Integration costs were 6 cents a share, the company said.
PNC paid about $3.47 billion for Royal Bank of Canada’s RBC Bank USA and its related credit-card assets, a transaction that was completed in March. The purchase is expected to add 40 cents to earnings per share for the full year, excluding integration costs, Johnson said in April.
Provisions for credit losses rose to $256 million from $185 million in the first quarter and compared with $280 million a year earlier.
Total loans jumped 20 percent to $180.4 billion, led by commercial lending.
The net interest margin, the difference between what PNC pays on deposits and makes on loans, widened to 4.08 percent from 3.90 percent in the first quarter and 3.93 percent a year earlier. Johnson said on the call that the margin will probably hold steady for the rest of the year and come under pressure in future quarters.
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