Bank Profits Overshadowed by Citi
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Pittsburgh, Pennsylvania-based PNC Financial Services Group (NYSE: PNC) reported a 13% rise in its third-quarter profits, but you may not have heard about it. PNC Financial's solid performance was overshadowed by the untimely nature of its announcement. The bank's earnings conference call, on which financial analysts traditionally participate, was scheduled for about nine o-clock AM on Tuesday, which was about the same time that the Citigroup shakeup was revealed.
As a result, the Citi news drew in financial analysts that would normally participate on PNC's call, slashing the usual number of PNC participants by more than half, according to James Rohr, PNC CEO, on CNBC.
Shares of PNC, a regional dividend-paying company, are trading at about 9% below the regional bank's 52-week high. PNC's Rohr went to the heart of the country's unemployment crisis during the company's ill-heard conference call. He stated:
"We're really just not seeing people plunking down a lot of dough to expand their business and build plants and hire a lot of people," said Rohr.
Nonetheless, PNC had a solid quarter. Net income rose to $925 million, or $1.64 per share, which exceeded Wall Street estimates. PNC is operating on most all cylinders, and reported a rise in customers, an increase in deposits and a one-percent increase in its business loans versus the last quarter. As The Wall Street Journal points out, those areas of strength helped to counter weakness in the firm's lending profit margins, which declined to 6.3% in the period versus the company's 2Q amid "lower purchase accounting accretion," according to the company's earnings statement.
PNC's stock dropped on its results. Rohr noted on CNBC that because of the focus on Citi on its earnings day, investors might not have read all the fine-print in the bank's results. The net interest margin fell because the accretion related to PNC's acquisition of RBC was less, Rohr noted, and in fact will continue to fall in subsequent quarters amid accretion albeit in lesser amounts.
A similar fate fell upon another regional bank play, San Francisco, California-based Wells Fargo (NYSE: WFC). The company's third quarter results of $4.9 billion in net income, or $0.88 per diluted share, improved over the previous quarter and year-ago-period results. The stock shed nearly 3% post-earnings.
Wells Fargo's results were hampered by a lower net interest margin of 3.66%, which is what plagued PNC, although in the case of WFC there were different factors driving the margins lower. Despite rising customer deposits and lending activity, Wells Fargo experienced lower income in certain of its fees, lower interest rates and the increase in short-term and cash exposures, which the company said diluted its margin.
One banking stock that investors did celebrate on profit news in early activity was financial institution Morgan Stanley (NYSE: MS), which unveiled its third quarter performance on Thursday. Excluding an accounting charge tied to a murky accounting rule that changes the way the company values its debt (a rule whose days are numbered), Morgan Stanley generated an 18% increase in sales to $7.6 billion and net income of $535 million, or $0.28 per share, which exceeded analyst estimates.
As noted on CNBC, Morgan Stanley was helped by a surge in its fixed-income trading revenue, which nearly doubled to $1.4 billion and which spotlights the favorable low-rate environment for fixed-income trading. Morgan Stanley's book value per share and tangible book value of $30.53 and $26.65, respectively, are trading far above the bank's market value of just over $18 per share.
Despite the slowdown of activity in the capital markets, the financial sector is holding its own. Banks like PNC can rely on consumer deposits to offset weakness elsewhere, while big banks like Morgan Stanley found strength in its trading business to counter tepid deal activity. Despite volatility, financial institutions find a way to evolve if they want to survive and I think that is precisely what Citigroup will do with its change at the helm.
GerelynT has no positions in the stocks mentioned above. The Motley Fool owns shares of PNC Financial Services and Wells Fargo & Company. Motley Fool newsletter services recommend Wells Fargo & Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.