PNC’s fee-income picture gets cloudier

Fee income dipped more than expected in the first quarter at PNC Financial Services Group, and the economic fallout from Russia’s invasion of Ukraine is partly to blame, executives said Thursday.

The $550 billion-asset company reported roughly $1.8 billion in noninterest income during the first quarter, down by 17% from the previous three months.

That decline was bigger than the 14% to 16% drop the Pittsburgh company warned of in March because of a slowdown in business activity and changes to the way it calculates noninterest income.

Fees from the usually busy capital markets team, which advises on client merger-and-acquisition deals, declined 45% from the previous quarter to about $252 million. The company had previously expected capital markets fees this year to be 20% lower than last year’s.

“While we had expected fees to be down sequentially, reflecting typical first-quarter seasonality, the decline actually exceeded normal interest rate volatility and probably the Russian-Ukraine conflict adversely impacted certain of our capital markets businesses among other areas,” CEO William Demchak said on a conference call with analysts to discuss first-quarter results.

Banks have been dealing with operational and business challenges stemming from the Ukraine crisis and the resulting sanctions against Russia since its attack began in late February.

But the uncertainty may have only delayed the kinds of business plans that PNC’s capital markets team helps clients with rather than canceled them. The company is sticking with its forecast of between 9% and 11% growth in total revenues for the year, with the expectation that some of its fee-generating business activity will return.

“The first quarter was slower than we expected even at those reduced levels, but for the full-year guide, I have most of that back in there,” Chief Financial Officer Robert Reilly said. “So most of what we expected to occur in the first quarter that didn’t occur is still in the full-year guidance.”

Noninterest income from the company’s residential and commercial mortgage business dropped by 24% over the previous three months and 15% year over year. Reilly said the fall was primarily due to decreased commercial mortgage activity.

The slowdown in fee-generating businesses led PNC to report net income for the first quarter of roughly $1.4 billion, down about 21% from the first quarter of 2021.

Still, earnings per share of $3.23 beat the consensus $2.77. Analysts at RBC Capital Markets, for instance, had forecast an even steeper drop in noninterest income to $1.77 billion instead of the more than $1.8 billion reported.

Generally, executives said that fees the company missed out on in the first quarter would likely be recouped during the rest of the year with one exception — the mortgage business. PNC forecasts the Federal Reserve will hike its main borrowing rate roughly eight times this year and pinch demand for home loans.

“Mortgage [fees] were off from what we thought at the beginning of the year because of rates,” Reilly said.

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