No Change to Our $175 Fair Value Estimate for PNC After Third-Quarter Earnings

Director

Michael Wong

Strategist

Eric Compton

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PNC is one of the larger regional banks in the U.S., has a fairly diversified fee base, and has a national presence, but is concentrated primarily in the East and Midwest. The bank has grown substantially from acquisitions, transforming itself with the integration of the troubled National City (doubling the size of PNC) in 2008, acquiring RBC’s U.S. branch network in the Southeast in 2012, and more recently picking up BBVA USA in 2021 (a roughly 25% increase in size). 

PNC has also been successful at organically expanding its customer base, both in commercial banking and in retail. An expanding client base has led to solid loan, deposit, and fee income growth. Selling new products into the formerly underperforming RBC branch network has worked as well, and PNC now seems poised to repeat this effort with the acquisition of BBVA. The bank is also attempting to grow its Midwest commercial franchise, along with retail growth efforts in the same areas where commercial expansion has been successful in the past.

A successful acquisition history and improved credit performance during the 2007 downturn make PNC one of the better operators we cover. Overall, we view the bank as a solid regional banking franchise, with a national presence and scale, retail and commercial offerings, a successful asset management unit, and solid middle market investment banking operations with its Harris Williams unit. 

PNC has executed on many expense-saving initiatives over the years, and management has been actively reinvesting many of these savings back in the business, with multiple bolt-on acquisitions already completed and more likely to occur in the future. As more and more retail transactions go through digital channels and commercial margins improve in PNC's newer markets, we expect improving operating efficiency for the bank.

In 2023 and beyond, we're hoping for slightly above average growth as the bank optimizes the old BBVA footprint, although the current banking turmoil and overall economic environment could delay how soon some of these benefits show up in the financials. We also view PNC's more conservative duration risk management favorably in the current market environment.

Business Strategy & Outlook

We believe PNC Financial Services deserves a narrow moat rating, based on maintainable cost advantages that are consistent with our moat framework for banks. While we believe PNC likely has some credit cost advantages, we think this has become less of a differentiator as essentially all the largest banks have improved underwriting standards compared with pre-2007. Instead, we would point to the bank’s scale and operating efficiency, particularly after the BBVA acquisition. We now expect returns on tangible common equity to average closer to 15% easily above our cost of equity of 9%. We also expect the bank’s efficiency ratio to improve to the mid-50s over time, generally within the range we consider moat worthy. 

We argue that bank moats are primarily derived from two sources: cost advantages and switching costs. Cost advantages are derived from three key factors: strong underwriting, a low-cost deposit base, and excellent operating efficiency, with regulatory costs a final consideration that must be factored in. Within the operating efficiency bucket, we also see room for economies of scope leading to a cost advantage via lower relative customer acquisition costs. This factor applies primarily to the banks with the largest distributional scale and the largest breadth of products.

PNC has historically demonstrated superior underwriting abilities in comparison to its peers. During the financial crisis of 2007, the bank performed much better than peers, reporting provisioning as a proportion of net interest income of approximately 24% compared with a peer group average of about 37% (2007-12). Additionally, PNC consistently reported lower net charge-offs than peers through the cycle, with the net charge-off ratio peaking at 1.9% compared with 2.4% for the peer group. With the 2008 acquisition of National City, PNC effectively doubled in size and has been growing ever since, both organically and inorganically. While mergers of this nature can change a bank’s culture, we still feel the bank’s underwriting culture has remained strong, demonstrated by lower net charge-offs than peers over the last five years. Therefore, it could be argued that PNC has developed some amount of cost advantage due to its underwriting prowess.

While PNC once had some funding cost advantages, we believe these have eroded over time, leaving the bank somewhere in the middle of the pack within our coverage. As such, we don’t see the bank’s cost of funding as a major advantage compared with peers.

Rather, we think the most important driver of the bank’s narrow moat is its scale and operating efficiency. PNC had tended to be fairly average here, particularly if the effects of the BlackRock stake were removed. However, the bank made a major move in June 2021, closing its acquisition of BBVA (increased balance sheet by approximately 25%). The bank funded this acquisition by selling off its stake in BlackRock. The bank’s stake in BlackRock funded the acquisition, one for one, with essentially all the cash generated from the sale deployed toward the acquisition of BBVA USA. This accomplished two major things, first, it removed the BlackRock stake (which we had previously viewed as a non-operating asset and therefore excluded it from our moat consideration), and second, this replaced these non-operating assets entirely with core operations that were expected to generate an IRR of greater than 19%, improve the bank’s core ROTE, and also improve operating efficiency as PNC cut roughly 35% of BBVA’s expense base. Therefore, we feel comfortable looking at PNC’s overall numbers now (without excluding anything), and we project the additional scale will lead to a new critical mass, helping the bank achieve moatworthy operating efficiency. This event has therefore driven our upgrade of PNC to a narrow moat rating. We now expect the bank to eventually reach an efficiency ratio of 58% over time, better than the historical ratio that often struggled to break 60%. 

We also think the largest banks with the most scale will be in the best position to compete in the future, and PNC fits this description. With PNC now being one of the largest regional banks in the country, with national scale and a fairly complete product set (more complete digital offerings, retail, commercial, asset and wealth management, investment banking), we think PNC will be in an advantaged position to invest in technology and expansion activities compared with smaller peers. We think this will only increase in significance over time as competition heats up and the importance of technology matters more and more.

From a systemic standpoint, we believe the U.S. banking system has improved over the last decade, as capital levels supporting the banking system are at all-time highs. Further, regulation has also improved since the financial crisis. The U.S. banking market is quite fragmented, and PNC must compete with a variety of regional and community banks as well as large money center institutions, although this fragmentation has gradually decreased since the 1990s. While we view the banking sector as intensely competitive, the largest banks by asset size have generally been able to earn higher returns on equity for the last several decades, and still do so today. Our long-run outlook is generally positive from a macroeconomic and political standpoint for the U.S. banking system, as the U.S. is still the world's leading democracy, has increased GDP at a steady pace for years, and maintains the world's reserve currency, all of which should contribute to long-run banking stability.

PNC is not large enough to be considered a global systemically important bank and does not have to comply with some of the more burdensome regulatory requirements. Recently, the Federal Reserve eased liquidity coverage requirements for banks with assets between $250 billion and $700 billion, as a result of which PNC is no longer expected to maintain 100% liquidity coverage. This will allow the bank to have a greater degree of control over its operations. Other previous requirements for PNC still hold, and the bank is still subject to the Federal Reserve’s annual stress tests, which are required of banks with over $250 billion in assets. As PNC is one of the largest regional banks not labeled a GSIB, it can to some extent enjoy better relative regulatory costs.

Narrow

Economic Moat

PNC Financial Services

PNC owns 22% of BlackRock, the largest asset management firm in the world by assets under management. This ownership interest had a market value of $17.9 billion as of December 31, 2017.

BlackRock

Citizens National Bank was founded on July 11, 1890 in Laurel, Maryland as Citizens National Bank of Laurel.The bank's founder and first president was Charles H. Stanley. On April 1, 1965, it was renamed to Citizens National Bank after merging with The Central Bank of Howard County. On September 15, 2007, Citizens National was acquired by PNC Bank, National Association.

Citizens National Bank

The PNC Financial Services Group, Inc. is a holding company, which engages in the provision of financial services. It operates through the following segments: Retail Banking, Corporate and Institutional Banking, Asset Management Group, and Other. The Retail Banking segment offers deposit, lending, brokerage, investment management, and cash management products and services to consumer and small business customers. The Corporate and Institutional segment covers the lending, treasury management, and capital markets-related products and services to mid-sized and large corporations, government, and not-for-profit entities. The Asset Management Group segment includes personal wealth management for high net worth and ultra-high net worth clients and institutional asset management. The company was founded in 1983 and is headquartered in Pittsburgh, PA.

Earnings data Q1 2024

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The PNC Financial Services Group, Inc (PNC) closed at $133.96 in the latest trading session, marking a +1.19% move from the prior day.

The PNC Financial Services Group, Inc (PNC) Outperforms Broader Market: What You Need to Know

Speakers from across the country and region share what's in store for the year ahead at the 60th annual ASU/PNC Bank Economic Forecast Luncheon TEMPE, Ariz. , Nov. 28, 2023 /PRNewswire/ -- A precise 2024 economic outlook would be invaluable, given such an evaluation is complex.

2024 outlook from ASU and national economists

In the latest trading session, The PNC Financial Services Group, Inc (PNC) closed at $128.70, marking a +0.59% move from the previous day.

The PNC Financial Services Group, Inc (PNC) Laps the Stock Market: Here's Why

PITTSBURGH , Nov. 21, 2023 /PRNewswire/ -- The PNC Financial Services Group, Inc. (NYSE: PNC) announced today that Chairman, President and Chief Executive Officer William S. Demchak and Executive Vice President and Chief Financial Officer Robert Q.

PNC Executives To Speak At Goldman Sachs Conference

PNC calculates the cost of Christmas from the holiday song "The 12 Days of Christmas" Increases in the Index are largely driven by labor costs, mirroring the U.S. economy Five of 12 Gifts had no increase in price compared to 2022 PITTSBURGH , Nov. 16, 2023 /PRNewswire/ -- True Loves get a bit of a break this year as PNC Bank's 40th annual Christmas Price Index® (PNC CPI) edged up 2.7%, noticeably lower than last year's hefty 10.5% increase and slightly less than the Consumer Price Index topline, which is at 3.2% year over year. The PNC CPI is a light-hearted take on the Bureau of Labor Statistics' (BLS) CPI, which measures the change in prices consumers could expect to pay for True Love's gifts, outlined in the classic holiday carol, "The Twelve Days of Christmas.

Now in its 40th Year, the PNC Christmas Price Index Increases 2.7%, Less Than the U.S. Consumer Price Index

Comerica

Truist Financial

The banking crisis in March 2023 affected even the best bank stocks as higher interest rates put pressure on liquidity. With interest rates at 5% compared with March's 4.75%, risks remain due to tighter lending standards and potentially higher yields.

The 3 Best Bank Stocks to Survive Higher Yields

Allianz SE

Bank of Montreal

Bank of Nova Scotia

Canadian Imperial Bank of Commerce

Enterprise Products Partners

Legal & General Group PLC

Manulife Financial

Realty Income Corp

Pfizer

Philip Morris

Prudential Financial

Simon Property Group

U.S. Bancorp

Americans are increasingly worried about job losses, and long-term inflation expectations are at a 12-year high. Leading economic indicators suggest a potential recession within three months, while unemployment is predicted to rise, and stagflation is a concern. A-rated ultra-yielding SWANs are a great way to invest money wisely during a high uncertainty period. Rock-solid balance sheets, great risk management, and safe ultra-yield is always in fashion.

15 A-Rated 6% Yielding SWANs Perfect For What's Coming Next

Bank of America

Bank of New York Mellon

Citigroup

Capital One

JPMorgan Chase & Co

M&T Bank

Wells Fargo

Zions Bancorp

Many banks have reported significantly larger unrealized securities losses in 3Q as interest rates rose in the quarter. The unrealized losses have grown so large as to be orange flags for a few banks. One of the reasons there could be new increased capital requirements is because of the large unrealized losses across the banking industry.

Q3 List Of Banks And Their Increasing Paper Losses In Their Debt Securities Portfolios

Amgen

ConocoPhillips

Cisco Systems

Goldman Sachs

Johnson & Johnson

Coca-Cola

MetLife

Altria

Morgan Stanley

NextEra Energy

PepsiCo

Sempra Energy

Target

Texas Instruments

Vanguard High Dividend Yield ETF

There are 22 stocks on my high yield watchlist for November 2023. The majority of the stocks on my watchlist are undervalued based on dividend yield theory. An equally weighted portfolio of these stocks underperformed the Vanguard High Yield Dividend ETF by about 1% during the month of October.

High Yield Stock Watchlist - November 2023

First Horizon National

Fifth Third Bancorp

KeyCorp

Regions Financial

State Street

Western Alliance Bancorporation

Big U.S. banks have signaled that they expect net interest income to bottom out in the next few quarters as they keep an eye on whether the cost of consumer deposits will come down, a bank analyst said in a research note on Monday.

JPMorgan's and PNC's mixed outlook on net interest income draws attention from analyst after industry gathering

Apple

American Express

Boston Properties

Comcast

Home Depot

Mastercard

McDonald's

Phillips 66

Rio Tinto plc Sponsored

Royal Bank of Canada

Schwab US Dividend Equity ETF

Charles Schwab

Visa

Verizon

The construction of a dividend-income portfolio brings several benefits for investors, one of which is generating extra income. In today's article, I will show you how you could allocate the amount of $50,000 among 20 dividend paying companies/ETFs that I consider to be attractive right now. Due to its allocation, the portfolio reaches a Weighted Average Dividend Yield [TTM] of 3.86%, indicating that its dividend payments could help you cover your monthly expenses.

How To Build A Dividend Portfolio With $50,000 Among 20 Dividend Paying Companies/ETFs

Estee Lauder

Enphase Energy

SPDR S&P Regional Banking ETF

LVMH Moet Hennessy Louis Vuitton

Moderna

Polestar Automotive Holding UK PLC

SolarEdge Technologies

Teladoc

Tesla

VinFast Auto Ltd

Tax-loss selling may occur earlier this year, instead of the during usual time of selling pressure in late December. DataTrek suggests a list of stocks that may bounce back in November that we discuss. FMC Corporation, SolarEdge Technologies, Moderna, KeyCorp, and The Estee Lauder Companies are stocks to avoid due to weak performance and market conditions.

5 Stocks To Sell Before Tax-Loss Season Begins

Citizens Financial Group

America's regional banks are reportedly hoping to get healthier by getting smaller. As The Wall Street Journal (WSJ) reported Monday (Oct. 23), these lenders are scaling back following a quarter that saw banks like KeyCorp, Truist and Citizens Financial record double-digit declines in profit.

Regional Lenders Are Getting Smaller to Stay Afloat

PITTSBURGH , Oct. 19, 2023 /PRNewswire/ -- The PNC Financial Services Group, Inc. (NYSE: PNC) announced today that Executive Vice President and Chief Financial Officer Robert Q. Reilly and Executive Vice President and Head of PNC Real Estate Michael Thomas will discuss business performance, strategy and banking at 12:45 p.m.

PNC Executives To Speak At BancAnalysts Association Of Boston Conference

Shares of PNC Financial (PNC) gain 1.5% on better-than-expected Q3 earnings, banking on decent expense-control efforts.

PNC Financial (PNC) Q3 Earnings Surpass on Lower Expenses

PNC Financial Group began staff reductions that will decrease its workforce by 4%. The move is expected to reduce the company's 2024 expenses by $325 million at a time when it is focused on expense management, “particularly in the current environment,” PNC Financial Group Chairman, President and CEO Bill Demchak said Friday (Oct.

PNC Financial Group Begins Reducing Workforce by 4%

The PNC Financial Services Group, Inc. (NYSE:PNC ) Q3 2023 Earnings Conference Call October 13, 2023 11:00 AM ET Company Participants Bryan Gill - Director of Investor Relations Bill Demchak - Chairman, President and Chief Executive Officer Rob Reilly - Executive Vice President and Chief Financial Officer Conference Call Participants John Pancari - Evercore Nate Stein - Deutsche Bank Scott Siefers - Piper Sandler Gerard Cassidy - RBC Bill Carcache - Wolfe Research Peter Troisi - Barclays Mike Mayo - Wells Fargo Securities Ken Usdin - Jefferies Bryan Gill Good morning, and welcome to today's conference call for The PNC Financial Services Group. I am Bryan Gill, the Director of Investor Relations for PNC.

The PNC Financial Services Group, Inc. (PNC) Q3 2023 Earnings Call Transcript

Lower provisions and a fall in expenses support PNC Financial's (PNC) Q3 earnings. However, a decrease in NII and fee income are headwinds.

PNC Financial (PNC) Q3 Earnings Beat Estimates, Stock Down

Although the revenue and EPS for The PNC Financial Services Group, Inc (PNC) give a sense of how its business performed in the quarter ended September 2023, it might be worth considering how some key metrics compare with Wall Street estimates and the year-ago numbers.

The PNC Financial Services Group, Inc (PNC) Reports Q3 Earnings: What Key Metrics Have to Say

PNC Financial Services (NYSE:PNC) shares fell more than 3% in early trade after the Pennsylvania-based bank and financial services firm reported a revenue miss and drop in earnings for the third quarter. Revenue declined year-over-year from $5.5 billion to $5.2 billion.

PNC Financial Services posts 3Q revenue miss and drop in earnings

The PNC Financial Services Group, Inc (PNC) came out with quarterly earnings of $3.60 per share, beating the Zacks Consensus Estimate of $3.18 per share. This compares to earnings of $3.78 per share a year ago.

The PNC Financial Services Group, Inc (PNC) Q3 Earnings Top Estimates

PNC Financial Services Group said on Friday it would reduce its workforce by about 4% as part of its cost reduction plans after it posted a drop in profit in the third quarter.

PNC Financial Services to cut jobs after quarterly profit drop

Generated positive operating leverage; increased pretax, pre-provision earnings Grew capital and tangible book value PITTSBURGH , Oct. 13, 2023 /PRNewswire/ -- The PNC Financial Services Group, Inc. (NYSE: PNC) today reported: For the quarter In millions, except per share data and as noted 3Q23 2Q23 3Q22 Third Quarter Highlights Financial Results Comparisons reflect 3Q23 vs. 2Q23 Revenue $  5,233 $  5,293 $  5,549 Income Statement   ▪   Generated positive operating      leverage of 3% ▪   Revenue declined 1% ▪   Expenses were well controlled,     decreasing 4% ▪   PPNR increased 3% ▪   Provision for credit losses of     $129 million   Balance Sheet   ▪   Average l oans decreased 2% ▪   Average d eposits declined 1% ▪   Federal Reserve Bank balances     averaged $37.9 billion, an     increase of $7.3 billion ▪   ACL to total loans was stable ▪   Net loan charge-offs were $121     million, or 0.15% annualized to     average loans ▪   AOCI was a negative $10.3     billion, reflecting the     unfavorable impact of interest rate     movements ▪   TBV increased to $78.16 ▪   CET1 capital ratio increased 30     basis points to 9.8% Noninterest expense 3,245 3,372 3,280 Pretax, pre-provision earnings (PPNR) (non-GAAP) 1,988 1,921 2,269 Provision for credit losses 129 146 241 Net income 1,570 1,500 1,640 Per Common Share Diluted earnings $    3.60 $    3.36 $    3.78 Average diluted common shares outstanding 400 401 410 Book value 105.98 105.67 97.59 Tangible book value (TBV) (non-GAAP) 78.16 77.80 69.98 Balance Sheet & Credit Quality Average loans    In billions $  319.5 $  324.5 $  313.0 Average deposits    In billions 422.5 425.7 439.2 Accumulated other comprehensive income (loss) (AOCI)    In billions (10.3) (9.5) (10.5) Net loan charge-offs 121 194 119 Allowance for credit losses (ACL) to total loans 1.70 % 1.68 % 1.67 % Selected Ratios Return on average common shareholders' equity 13.65 % 13.01 % 14.97 % Return on average assets 1.12 1.08 1.19 Net interest margin (NIM) (non-GAAP) 2.71 2.79 2.82 Noninterest income to total revenue 35 34 37 Efficiency 62 64 59 Common equity Tier 1 (CET1) capital ratio 9.8 9.5 9.3 See non-GAAP financial measures in the Consolidated Financial Highlights accompanying this release.

PNC Reports Third Quarter 2023 Net Income of $1.6 Billion, $3.60 Diluted EPS

PNC Financial (PNC) is seeing favorable earnings estimate revision activity and has a positive Zacks Earnings ESP heading into earnings season.

Is a Surprise Coming for PNC Financial (PNC) This Earnings Season?

News for PNC Financial Services Stock (PNC)