Regional Banks Reporting 4Q12 Are Flying High

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Continuing the trend in the US banking sector, US Bancorp (NYSE: USB) and PNC (NYSE: PNC) reported strong 2012 fourth quarter results. According to Fitch, which rates the bank as one of the top rated banks globally, USB’s continued strength in mortgage banking was a major contributor to the bank’s earnings; while improvement in PNC’s results was associated with better revenues. USB’s adjusted bottom line of $0.75 per share met its consensus mean estimates, it was above the linked quarter figure of $0.74 per share. PNC’s adjusted bottom line of $1.71 per share exceeded its estimate of $1.57 per share. The operating revenues for USB were $5.1 billion edged up 1% from a quarter ago, while PNC’s adjusted revenues of $4.16 billion were 5% above the revenues of the prior quarter.

USB’s spread income of $2.8 billion remained largely flat despite a 3 basis points decline in net interest margin to 3.54%. PNC’s revenues beat estimates largely on increase in spread income and asset growth. PNC’ spread income of $2.4 billion increased 11% over the third quarter due to a 3 basis points expansion in net interest income to 3.85%. Going forward, the management at PNC expects a 3% decline in net interest income during the first quarter of 2013.

USB’s operating fee income of $2.3 billion declined 3% compared with the linked quarter. The sequential decline was associated to lower mortgage banking and corporate payments, partly offset by strong credit and debit card revenues. Credit and debit card revenues increased 14% sequentially to $242 million. However, mortgage banking revenues of $476 million declined 8% on a decline in production margins. Mortgage originations increased 3%, while corporate payments were down 11% sequentially.

In contrast, adjusted fee income of $1.8 billion for PNC came in 15% better than the linked quarter. The improvement was largely due to strong corporate services and residential mortgage fees. Corporate services of $349 million improved 18% over the prior quarter on higher M&A Fees. Other income increased due to higher commercial mortgage banking activity, while asset management fees and services charges on deposits declined 1% each.

Loan and Deposits

Solid growth in USB’s deposits was seen during the most recent quarter, while average loans increased 6% QoQ driven largely by commercial loans growth. Average deposits were up 8% over the past quarter driven largely by an increase in non-interest bearing deposits. For PNC, average loans of $183.2 billion were up 6% compared to the prior quarter. Much of the growth in loans was driven by 16% growth in commercial loans and equipment lease financing.


USB’s expenses were well managed during the fourth quarter as operating expense of $2.6 billion remained flat compared with the linked quarter. Operating efficiency ratio improved from 51% a year ago to 53% at the end of the most recent quarter.

In contrast, PNC’s expenses were not well managed. Total operating expenses of $2.6 billion were up 3% from a quarter ago. Operating efficiency ratio was 56% versus 57.4% in third quarter. Going forward, the management expects an 11% decline in non-interest expenses.

Credit Quality

Credit quality for USB’s assets improved during the fourth quarter. Non-performing assets of $2.1 billion declined 5% sequentially, while the reported charge-offs of $468 million declined 13% over the same time period.

Credit quality for PNC’s assets improved as the bank’s non-performing assets of $3.8 billion declined 6% largely due to a decrease in NPAs in commercial real estate, partially offset by increase in consumer lending NPAs.

Capital Positioning

USB strengthened its capital position during the fourth quarter of 2012 as represented by a 10 basis points improvement in the tier 1 common equity ratio to 9.1%. The estimated Basel III tier 1 common ratio improved to 8.3% which is also above the 8% target.

Similarly, PNC improved its capital position during the fourth quarter of 2012. While the tier 1 capital ratio of 11.7% remained flat, the tier 1 common ratio improved from 9.5% to 9.6% over the linked quarter. The Basel III estimated tier 1 common ratio reached 7.3%, which the management expects would reach the target of 8 - 8.5% by year-end.


Both the regional banks presented strong results for the fourth quarter of 2012. I am bullish on USB; the banks fee income was clearly helped by strong mortgage results. Going into 2013, I expect healthy mortgage banking contributions, while an expansion in the bank’s payment business will help generate incremental fee income. I expect the bank will continue to gain market share. On the other hand, a diversified business model of PNC provides the bank with operating flexibility in such challenging environment. However, PNC needs to focus on cost cutting initiatives. I believe expense management will be a focal point in the coming quarter, which is why I am neutral on PNC.

I believe the trend of improved capital positioning, better credit quality and growth in loans and deposits will continue to be visible in the results of Regions Financial. Therefore, investors who are invested in Regions Financials can expect the aforementioned drivers to play a key role in its fourth quarter performance which is scheduled to be disclosed on January 22. 

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