Bank Performance for Bank Management: PNC Bank
With its head office located in Pittsburgh, Pennsylvania, PNC bank is the fifth largest bank in terms of asset management in the US. As of December 2015, it had assets totaling approximately $ 358 billion. Its deposits were about $249 billion. In terms of branches, PNC bank is the fifth largest bank with 2600 branch offices in 19 states as well as in the District of Columbia. It also has a huge network of ATMs with 9000 such facilities. In addition to this, the bank also offers online and mobile services to its esteemed customers. The banks 52,000 employees offer various services such as banking, specialized financial business service, asset management, and financial processing services.
Some of the main factors that have led to the growth and emergence of PNC bank as a leading bank in the US are acquisition and mergers. Soon after its establishment in 1845 as Pittsburgh Trust and Savings Company, the bank had a made a series of mergers that resulted in it renaming itself as Pittsburgh National Bank in 1859. Later, it renamed its self to First National Bank of Pittsburgh in 1863. Pittsburgh National Bank later became a subsidiary of Pittsburgh National Corporation. In 1982, PNC Financial Corporation was formed from the merger between Provident National Corporation and Pittsburgh National Corporation. PNC Financial Corporation continued with its policy of acquisition of banks during from 1991 until 2008. Some of the notable recent acquisitions are the Riggs Bank acquisition in 2005, the acquisition of the Mercantile Bankshare in 2007, and the acquisition of Sterling Financial Corporation still in 2007. Importantly, the acquisition of the National City Bank enabled PNC Bank to be the largest bank by deposits in the US.
Stock Price of Holding Company
Discuss the stock price performance of the holding company of the bank during the past three years. Remember the holding company may have other assets than the bank. But for almost all BHCs the bank is the largest asset.
Tier One Capital
The tier one capital indicates that the company’s stock have been enjoying a robust growth during this period. Save for a dip that occurred on 6/30/2015, all other periods showed growth. The figures were 1.34 on 12/31/2013, 2.08 on 12/31/2014, -0.32 on 6/30/2015, 0.33 on 12/ 31/2015, and 1.4 on 6/30/2016. Nonetheless, peer groups had higher rates at 7.79 on 12/31/2013, 11.52 on 12/31/2014, 11.51 on 6/30/2015, 11.17 on 12/ 31/2015, and 9.92 on 6/30/2016. The performance by peer banks shows that there is room for improvement in PNC Bank. Given its huge capital, the bank should tap into various avenues of making more income so that its stocks can continue to increase.
Return on Assets and Return on Equity
Describe the behavior of your bank’s ROA and ROE over the past three years. How does the performance of ROA and ROE relate to that of the peer group over this period based on the results on the Uniform Bank Performance Report, given the relationship ROE=ROA times the equity multiplier (asset/equity) has your ROE been driven more by changes in ROA or by changes in the equity multiplier? What are the main factors that account for the behavior of your ROA over this period?
Return on Assets (ROA)
In the banking sector, the return on assets is calculated using the net income ratio. In the UBPR calculation of ratios, net income ratio is calculated by dividing net income by average assets. From the analysis, the company has been able to maintain a high return on assets with a minimum return of 0.92, which occurred on 6/30.2016, and a maximum of 1.19, which occurred on 12/31/2013. These returns indicate that the company’s shareholders have been earning almost 1 dollar for every dollar of the company’s asset. It is important to note that a bank’s assets mainly comprise of its loans to customers. When compared to fellow banks, it performed poorly than them from 6/30/2015. In all these periods, the peer group average was higher than that of PNC Bank. The ROA for competitors ranged from 0.97 to 1.01 from the periods. In 2014 and 2013, the bank had returns that were higher than those of peer group banks. Accordingly, the bank ranked poorly on this assessment with a position of between 69 and 37 during these periods.
Return on Equity
Return on equity simply means how much investors earn for every dollar they invest into a business. The retained earnings to average total equity are what shows the ROE in USBR. They calculated by net income, less the cash dividends declared, divided by average equity capital. The company had a retained on equity rates were 1.79 on 12/31/2013, 1.57 on 12/31/2014, 1.19 on 6/30/2015, 1.33 on 12/ 31/2015, and 1.15 on 6/30/2016. When compared to peer groups, the company the bank underperformed. The average for the peer banks ranged between rates were 4.28 on 12/31/2013, 4.32 on 12/31/2014, 4.84 on 6/30/2015, 4.53 on 12/ 31/2015, and 5,13 on 6/30/2016. As a result, PNC Bank had a bad overall score of between 18 and 27 within the period.
Describe the behavior of your Bank’s efficiency ratio over the 3 years? How does it performance relate to the peer group? What factors have affected your efficiency ratio over this time period?
Average Earning Assets to Average Assets
This ratio shows the proportion of the banks assets that are used to generate income. In practice, a bank has various assets such as vehicles, physical infrastructure, and loans. Of all this assets, loans and related types of assets are the ones that generate income for the business. Therefore, this ratio indicated the proportion of assets that generates income for the business. The banks ratio improved from 88.94 on 12/31/2013 to 90. 55 on 6/30/2016. On the same note, the banks rank improved from 24 to 22 during this period. This rate of increase shows that the federal bank’s policy of minimizing lending rates to below 2.5% during this period was resulting in people taking more loans (which are assets for the bank), and accordingly improving the banks ratio. A closer look at competitors also showed they were more competitive than PNC Bank since they had a higher ratio of 92.12 on 12/31/2013 and 93.03 on 6/30/2016. The increase in their ratio was also due to increased borrowing that was a result of decrease in the federal lending rate to below 2.5%.
Interest Income (TE) to Average Earning Assets
This ratio shows the total interest on the taxable equivalent basis when compared with the bank’s average earning asset. Therefore, a high ratio is an indication of high performance by the bank. As of 12/31/2013, the bank had a ratio of 3.84, which has been consistently declining to 3.34 in 12/31/2014, 3.05 on 6/30/2015, 3.03 in 12/31/2015. There was a small rise to 3.09 on 6/30/2016. Banks in PNC markets have shown a similar pattern. On 12/31.2013, these banks had a ratio of 3.92, which fell to 3.71 on 12/31/2015. Similarly, they also had an increase from 3.71 on 12/31/205 to 3.74 on 6/30/2015. The fall in the interest income to average earning asset during these periods indicates a change in banking sector to reduce their interest rates to encourage borrowing. Accordingly, there was a reduction in interest income and an increase in assets (loans) for the banks. The small rise in this ratio on 6/30/2016 is an indication of an increase in interest rates by both PNC Bank and peer group banks as they respond to the Federal bank policy of increasing lending rate, as well as increased demand for loans. The ranking of the bank has improved from 40 to 14 during this period. Primarily, the rise is because a low interest rate makes a bank more competitive. When the bank had a rate of 3.84, it was ranked 40, however, recently when its rate is 3.09, the bank ranks 14.
Average Interest Bearing Funds to Average Assets
This ratio is calculated by dividing the interest earning funds with the banks average assets. Since this ratio indicates the cost associated with holding an interest bearing account, an increase in this ration makes the business less competitive. The banks rate increased from 77.64 on 12/31/2013 to 81.29 on 6/30/2016. Accordingly, the banks competitive position when compared to fellow banks worsened from position 41 to 57. Peer banks average rate only rose slightly when compared to PNC bank, from 77.48 on 12/31/ 2013 to 77.83 on 6/30/2016.
Interest Expense to Average Earning Asset
Earning assets in a bank include income from rental property, bonds, stocks, certificate of deposit accounts, and dividend. This ratio is calculated by dividing interest expense with the average earning earning asset. Accordingly, a low ratio indicates low expenses while a high ratio is an indication of high expenses and inefficiency. PNC Bank ratio increased from 0.27 0n 12/31/2013 to 0.37 on 6/30/2016. The peer banks rate on the other hand fell from 0.39 in 12/31/2016 to 0.33 on 6/30/2016. Accordingly, the banks score worsened from 34 to 62 due to increased inefficiency when compared with improving efficiency in the industry.
Net Interest Income –TE to Average Assets
This ratio indicates the net interest in a business subtracted the tax expense after which it is divided by the average interest generating assets. Accordingly, a fall in this ratio may be due to a fall in interest income, or an increase in expense. The opposite is also true, an increase in interest income, which is due to increasing interest fees, and a fall in expenses may lead to a decline a rise in this ratio. As on 12/31/2013, the bank had a ratio of 3.56, however, this rate steadily fell to 2.72 on 6/30/2016. The industry average during the same period fell from 3.5 on 12/31/2013 to 3.39 on 6/30/2016. Since the fall in interest rate is an indication that the bank was charging low interest rate, its bank position became better as it moved from position 53 on 12/31/2013 to 14 on 6/30/2016. Nonetheless, the low scores show that it was less efficient since investors made less returns from their investments.
Describe the behavior of your bank’s net interest margin (NIM) over the past three years? How does it performance relate to the peer group? What factors have affected your NIM over this time period?
Net Interest Income (TE)
The net interest income indicates the the banks interest income less interest expense divided by its average assets. Therefore, a high ratio indicates high returns for every dollar that the business invests. As of 12/31/2013, the bank had an interest margin of 3.17, which gradually and consistently declined to 2.46 on 12/31/2015 and it remained in this position on 6/30/2016. This fall in the net interest margin indicates that the bank was continuously reducing its interest rates for its loans. Noteworthy, in a bank, loans are the main component in interest earning assets. Peer banks also had a decline in this ratio, which fell from 3.22 on 12/31/ 2013 to 3.12 in 12/31/2015, and had a small increase in 2016 where it rose to 3.15 on 6/30/2015. Since the fall in interest margin for PNC Bank was higher than that of competing banks, it shows that it also charged lower interest rates. As a result, its position rose from 46 on 12/31/2013 to 12 on 6/30/2016.
The main factor that led to the fall in interest rates, which occurred in not only PNC Bank was the decrease in the Federal Bank lending rate. Since the end of the financial crisis of 2008-2009 period, the Federal Bank established a policy of offering low interest rates in order to spur the economy. Accordingly, banks have been lowering their interest rates in order to encourage investors to take up more credit. The increased rate of intake of credit, followed by a decrease in interest rates led to the overall fall in the net interest income margin. Simply, the small rise in net interest income by peer group banks is an indication of an increase in interest rates. Generally, these banks are responding to an increase in demand for credit, which causes interest rates to rise.
Describe your bank’s approach to liquidity measurement (Look at the management discussion in the 10K and the investor relation’s material and present data that indicates whether your bank is more or less liquid than banks in your peer group. What are the primary pros and cons of above-average liquidity? Of below average liquidity?
Net Non Core Fund Dep New $250M
PNC bank is appropriately liquid and able to invest in long-term investments. Its Net non-core-funding dependency ratio (NCFD) is less than that of competitors, which indicates that it is less dependent on short-term funds for its investments. Net non-core-funding dependency ratio (NCFD) shows the relationship between long-term earning assets and net-short term funds. Simply, long-term earning assets are those that take more than one year to mature while short-term funds are those that mature in less than one year, net of short-term investments. In finance, a small ratio is better since it indicates less dependence of short-term funds for the bank’s operations. On 12/31/2014, the bank had a NCFD of 9.53, on 12/31/2014, it was 6.61, this rate was 6.66 on 6/30/2015, it then rose slightly to 7.19 on 12/31/2015, and it was 8.04 on 6/30.2016. On the contrast, the peer group banks had a higher rate for all periods at 13.98, 13.96, 13.42, 12.87, and 12.88 on 6/30/2015, 12/31/2015, 6/30/2015, 12/31/2014, and 12/31/2013 respectively.
Net Loans & Leases to Assets
In addition to the above, the banks net loans and lease asset ratio is lower than that of peer banks in all the periods. Accordingly, this ratio indicates that the company covers all its loans much better than peer banks. As a result, it is more liquid that the peer banks, since its rate is lower. PNC Bank had a rate of 59.62, 58.99, 59.5, 60.83, and 62.79 on 6/30/2015, 12/31/2015, 6/30/2015, 12/31/2014, and 12/31/2013 respectively. Interestingly, all these ratios were less than those of peer banks all these periods. Peer banks had a score of 67.64, 66.73, 59.5, 65.02, and 63.5 during these periods, which shows that on average they were less liquid than PNC Bank.
Pros and Cons of been Above or Below Average
When a bank is above average in terms of liquidity, it is usually more secure from shocks in the market such as a sudden slowdown (a great depression) which may make borrowers be unable to pay their liability. In this case, even if some borrowers fail to pay credit in time, the bank will still be able to proceed with its activities. Nonetheless, if the bank is too liquid, it usually has the problem of not making maximum returns from its assets. Simply, the bank usually fails to make some high returns but high risks investments using borrowed cash.
The advantage of been below liquidity is that a bank is able to get higher returns at a high risk by using borrowed funds. Simply, PNC forgoes this opportunity when it avoid incurring high liabilities, and been less liquid. However, when a bank is below liquidity levels it always has a greater risk of failure or loss in case borrowers fail to repay their obligations in time.
How does your bank measure its interest rate exposure? What do the most recent measures show about the size of this exposure? If your bank wishes to reduce its interest rate exposure, what tactics might it use to produce such a result? Do you believe your bank is positioned for an increase in interest rates? Why or why not?
Noninterest income is the the rate that measures the bank’s exposure to interest rate changes. Simply, this rate measures the amount of income that PNC Bank earns from non-interest bearing assets. Accordingly, a high earnings from these assets indicates that the bank is properly diversified to sustain it activities without relying on income from interest bearing assets. Noninterest income is calculated by dividing the income earned from sources other than interest-bearing assets by the bank’s average assets. As of 12/31/2013, the banks rate was 1.87, these figures have continuously reduced to 1.76 on 12/31/2014, 1.68 on 6/30/2015, until 1.62 on 6/30/2016. When compared with interest income, it is evident that the banks, as well as peer banks heavily depend on interest income. For example, the interest income was 2.8 on 6/30/2016, and 3.41 on 12/31/2013. These figures indicate that interest income is almost double that of non-interest income. The same case was observed in in peer banks that had a n average of 3.62 on 12/31/2016 and 3.47 on 6/30/2016 for interest income. The bank score on this section was poor. On 6/30/2016, the company was ranked 82, while 12/31/2013, it had a rank of 84. On overall, this shows that the bank was charging more on its noninterest sources of income than peer banks since its score was also higher than the average of peer banks.
Whether an increase on interest rates affects the performance of the bank depends on an array of factors that stretch way beyond the interest rate increase. If all banks increase interest rates by the same margin, and there is an increase in economic growth in the country, an increase in interest rates will not change the demand for loans. In fact, it will lead to more income for the bank. Nonetheless, the high dependency levels on interest income by PNC Bank indicate that if the bank increases its interest rates on a pattern contrary to the market, such that most consumers stop accessing credit from it, it may be unable to survive.
What is your bank’s current level of non-performing loans to total loans and has it been increasing or decreasing? How does it performance relate to the peer group? What factors have affected this over this time period? Describe any other credit risk ratios that affected the bank’s performance?
LN&LS Allowance to Total LN&LS
This rate indicates the ending balance of loan and lease losses allowance divided by total loans and lease financing receivables. Simply, this rate indicates the provision for bad loans in the bank. The banks rate was 1.27 on 12/31/2013, 1.61 on 12/31/2014, 1.57 on 6/30/2015, 1.31 on 12/ 31/2015, and 1.27 on 6/30/2016. On all these periods, the company’s average provisions were higher than those of peer banks. Accordingly, these figures show that its percentage of non-performing loans was higher than it was among competitors. Peer groups average was 1.44 on 12/31/2013, 1.21 on 12/31/2014, 1.15 on 6/30/2015, 1.09 on 12/ 31/2015, and 1.07 on 6/30/2016. In light of this performance, the bank’s position was bad. It was position 68 on 6/30/2016 and 76 on 12/31/2016. The main factor that affected this ratio was the economic performance of the country in general. In late 2013, when the economy had a major slowdown, the rate of provisions was high. As of 12/31/2016, when the economy has started to recover, the provisions have started to reduce, which also shows that most individuals have also been able to repay their loans as expected.
Earnings Coverage of Net Losses (X)
This ratio indicates how properly the business incomes cover the loans that the bank has issues. It is calculated by dividing the net operating income before taxes, securities or losses, and extraordinary items plus provision for possible loan and lease losses by the sum of net loan and lease losses. The banks ratio has been improving over time. On 12/31/2013, it was 5.09, 9.41 on 12/31/2014, 14.02 on 6/30/2015, and 12.34 on 12/ 31/2015. However, it had a slight decline to 8.64 on 6/30/2016. The continued increase in this rate shows the banks policy to hedge itself against risks of default in loan payments. Nonetheless, the industry’s average is much higher. The rates were 17.63 on 12/31/2013, 30.02 on 12/31/2014, 48.35 on 6/30/2015, 33.31 on 12/ 31/2015, and 29.62 on 6/30/2016. Due to the high exposure rate when compared to peer banks, its position has been poor. It was 26 on 12/31/2013, 33 on 12/31/2014, 38 on 6/30/2015, 34 on 12/ 31/2015, and 32 on 6/30/2016.
Describe the behavior of your Bank’s capital ratios over the 3 years? How does it performance relate to the peer group? What factors have affected the capital ratio over this time period? Is the bank adequately capitalized (Remember to look at risk based capital information on the UBPR)
Rest+Nonac+RE Acq to Eqcap+ALLL
This ratio indicates the sum of restructured loans, nonaccrual loans, real estates acquired equity capital and loan and lease allowance. This sum shows the changes in the equity composition of a bank. Since restructuring of loans minimizes a bank’s loans, accordingly, it minimizes a reduction in capital. Accordingly, the higher the percentage of this ration, the better the performance of the bank. The rates were 13.45 on 12/31/2013, 11.53 on 12/31/2014, 10.02 on 6/30/2015, 9.77 on 12/ 31/2015, and 9.74 on 6/30/2016. Since this ratio is an indication if underlying business performance, it changes depending on non-performing loans and the value of acquired property. As a result, it kept fluctuating. On overall however, the business performed poorly when compared to its peer banks. Its scores were high over the entire period, which shows that the bank capital is exposed to potential losses. Peer banks had a score of 11.65 on 12/31/2013, 8.84 on 12/31/2014, 8.09 on 6/30/2015, 7.61 on 12/ 31/2015, and 7.31 on 6/30/2016.
Cash Dividends to Net Income
This ratio indicates the cash dividend declared at year-end divided by the net income earned. PNC Bank has been issuing a lot of dividends from 2013. Consequently, it has low levels of retained earnings, which increase a bank’s capital. The rates were 81.47 on 12/31/2013, 82.93 on 12/31/2014, 86.43 on 6/30/2015, 84.83 on 12/ 31/2015, and 86.29 on 6/30/2016. Peer banks had a score of 42.16 on 12/31/2013, 41.19 on 12/31/2014, 37.42 on 6/30/2015, 41.22 on 12/31/2015, and 37.95 on 6/30/2016. As a result, the bank had a poor score when compared to peer banks. It ranked between position 80 and 85, due to little retained capital. In this case, the banks policy of issuing a lot of dividends was what affecting the bank’s capital formation. The banks overall financial performance and dividend payout indicate that it is adequately capitalized.
Tier One Leverage Capital
The bank’s tier one leverage capital has been having swings on increases and decreases. The main factor for this swings are the bank’s policies and cost of capital as well as the use of capital. Generally, the bank will only access external or additional capital; therefore, even if the cost of additional capital is low, if it does not have need for this capital, it will not access it. The scores for this ratio were 9.78 on 12/31/2013, 9.19 on 12/31/2014, 9.94 on 6/30/2015, 8.66 on 12/ 31/2015, and 8.76 on 6/30/2016. Peer groups have also been having an almost similar score at 9.86 on 12/31/2013, 9.83 on 12/31/2014, 9.94 on 6/30/2015, 9.77 on 12/ 31/2015, and 9.74 on 6/30/2016.
Federal Insurance Corporation. (2016). Uniform Bank Performance Report: PNC Bank, National Association. Retrieved from https://cdr.ffiec.gov/public/Reports/UbprReport.aspx?rptCycleIds=90%2c86%2c83%2c81%2c76&rptid=283&idrssd=817824&peerGroupType=&supplemental=