PNC Financial Services Group, Inc. (PNC) reported $1 billion in net income, down 3% on a linked-quarter basis, according to Fitch Ratings. Results benefitted from higher spread income, improved fees, and lower credit costs. This was offset by much higher income taxes, and an increase in expenses. Even with the increase in income taxes, PNC's earnings over the past five quarters have demonstrated a good deal of consistency, averaging around $1.04 million per quarter.

The increase in income taxes was due to tax benefits accrued last quarter, which were primarily attributable to settling acquired entity tax contingencies. Fitch notes pre-tax earnings improved 3% on a linked-quarter basis.

For the first time in almost four years, PNC reported improvement in both its reported and core margin, which excludes the impact of purchase accounting accretion (PAA) on the net interest margin (NIM). PNC's NIM increased 3 basis points (bps) on a linked-quarter basis to 2.70%, though still below the average for the large regional banks.

Spread income improved 1%, while noninterest income increased 3% sequentially reflecting fee income growth. PNC has good revenue diversity, with noninterest income comprising a strong 46% of reported revenues in the fourth quarter of 2015 (4Q15), insulating the company from the impacts of the low interest rate environment on bank margins.

Noninterest expenses increased 2% on a linked-quarter basis due primarily to higher business activity. PNC disclosed it met its full-year goal of $500 million of cost savings in 2015 through the continuous improvement program, and has targeted an additional $400 million in cost savings in 2016.

The credit environment remains quite benign. While net charge-offs (NCOs) increased, they remained very low at just 23bps in 4Q15. Fitch notes that NCOs at this level are likely unsustainable for the company and the industry. PNC has indicated in the past that its through the cycle loss expectations are between 50bps and 60bps.

As previously disclosed, PNC derecognized a portion its purchased impaired consumer loans next quarter, reducing loan balances and related reserves by $468 million. As a result, reserves to total loans fell to 1.32%, down from 1.58% last quarter-end. Fitch views reserve coverage as appropriate, especially in light of PNC's strong historical track record of loan losses. Fitch notes PNC's NCOs over the past 10 years are both lower and less volatile than large regional bank peers.

PNC exposure to the energy sector is manageable. At Dec. 31, 2015, PNC reported $2.6 billion of oil and gas outstandings, unchanged from prior quarter-end. This represents just 1.3% of total loans. Similar to peers reporting to date, PNC noted the most pressure is to its oilfield services portfolio, which totals approximately $900 million, of which $200 million is neither asset based or investment grade.

PNC reported its estimated fully phased-in Common Equity Tier 1 ratio (CET1) under Basel III standardized approach rules was 10%, slightly down from the prior quarter. 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.

PNC expect three increases in short-term interest rates this year, in March, June and December at 25bps each. Based on this guidance, PNC expects modest growth in revenues and stable expenses in 2016. PNC also reiterated its aversion to bank M&A at this point, with much greater interest in Fintech investing.