OREANDA-NEWS. PNC Financial Services Group, Inc. (PNC) reported $989 million in net income for 2Q16, up 5% on a linked-quarter basis, for an ROA of 1.11%. On a year-over-year basis, net income fell 5.3%. The results are in line with Fitch Ratings' expectations for the company, which remains very highly rated. Results reflected strong fee income growth during the quarter and lower credit costs, partially offset by higher noninterest expenses and margin compression.

PNC reported strong fee income growth, up 16% on a linked-quarter basis, from higher client activity and seasonality. This is in line with PNC's prior guidance of an increase between 10% and 12%. There were broad-based improvements across all categories. PNC reported higher M&A advisory fees, securities underwriting activity, loan syndication fees, mortgage banking and payment-related fees. PNC also reported $51 million in negative valuation adjustments primarily associated with private equity investments under the Volcker Rule. The company has indicated it will continue to wind down its portfolio of nonconforming investments as the Volker Rules goes into full effect in July 2017.

The provision for loan losses declined 16% reflecting lower-energy-related provisioning. PNC reported some improvement in problem asset levels and consolidated lower loan losses. NCOs during the quarter remained low at 26bps during the quarter. Fitch expects loan losses for PNC and the industry will deteriorate from unsustainably low levels.

Non-interest expenses increased approximately 3.5% on a linked-quarter basis due to higher variable compensation costs, which were partially offset by the release of residential mortgage foreclosure-related reserves of $24 million in 2Q16. PNC continues to invest in technology and business infrastructure, and disclosed that approximately 18% of the branch network now operates under the universal model, as part of PNC's retail branch transformation strategy.

Spread income declined slightly due to a decline in purchase accounting accretion, as well as lower core net interest income. Lower securities yields and higher borrowing costs were partially offset by higher loan balances. The net interest margin (NIM) declined 5bps to 2.70% during the quarter, while the core NIM, excluding purchase accounting accretion, declined 2bps to 2.63%.

Loan growth was modest during the quarter at just 1%, with growth in large corporate and real estate loans offset by lower home equity and education balances. Compared to 2Q15, total loan growth was modest as well due to the company's declining consumer exposure. PNC grew its commercial real estate balances by a significant 16.3% over the last year, mainly in permanent lending given continuing disruptions in the CMBS market.

PNC reported some further deterioration in the energy portfolio. However, energy-related provisions were $48 million during 2Q16, as compared to $80 million last quarter, while non-performing loan balances were fairly stable at $293 million or 10% of outstanding related loans. PNC's exposure to the energy sector is on the lower end of the large bank universe. At June 30, 2016, PNC reported $2.7 billion of oil and gas outstandings, or less than 2% of total loans.

PNC reported its estimated fully phased-in Common Equity Tier 1 ratio (CET1) under Basel III standardized approach rules was a solid 10.2%, up roughly 10bps from the prior quarter. PNC received no objection to its capital plan under CCAR, which included an 8% increase in the common dividend to $0.55 a share, and $2 billion in share repurchases.

PNC also disclosed that its estimated pro forma Liquidity Coverage Ratio was in excess of 100% at both the consolidated and bank levels at quarter-end, above the phased-in requirement of 90% on Jan. 1, 2016.