PNC Financial Services Group
is one of the best-positioned regional banks in the United States. It has the scale to compete with industry leaders like
Bank of America
but is not burdened by the rigid capital requirements of banking giants.
At a recent $173, PNC shares (ticker: PNC) also look attractive, having fallen more than 20% from a record high of $228 earlier this year. The stock is trading at 12 times expected 2022 earnings and yielding 3.5%. The bank raised its quarterly dividend by 20%, to $1.50 per share, in April, and another increase is expected next year.
With its acquisition in 2021 of the American banking activities of the Spanish bank
PNC is now present in the 30 main markets of the United States. It’s called a national main street bank. CEO Bill Demchak, 59, who has run the bank for nine years, is considered one of the best banking executives in the country.
PNC’s second-quarter earnings rose 30% from a year ago to $3.42 a share. Revenue increased 10%, while non-interest expense increased 6%, resulting in favorable operating leverage. Like its peers, PNC is seeing an expansion in net interest margins as the Federal Reserve raises short-term rates and borrowing costs remain historically low. Loan growth was healthy at 5% in the second quarter, and the bank expects growth of 8% for the year.
Next year earnings are expected to rise 14% to around $16.50 a share as margins widen further, even as PNC potentially absorbs higher borrowing costs.
“PNC has the scale to compete with the biggest banks, but has developed a strong lending niche with middle-market businesses across the country and a strong retail banking offering,” said Jason Goldberg, banking analyst at
Goldberg rates the stock Overweight, with a price target of $222.
“PNC is over-indexed to Main St. bank and commercial lending tailwinds, under-indexed to weaker Wall St. banking headwinds, and likely a leader among banks,” Wells Banking Analyst Mike Mayo wrote. Fargo, after the bank released its second quarter results in mid-July.
Mayo said Barrons that the banking sector is experiencing “the best growth in commercial loans in 15 years. It’s PNC’s bread and butter. PNC demonstrates expense control and continued strong credit quality.
It has an overweight rating and a price target of $202.
With $541 billion in assets, PNC is in the same league as its rivals
(TFC), but well below the big four banks—JPMorgan (JPM), Bank of America (BAC),
(WFC) – each in the range of $2-4 trillion in assets.
Regulators have imposed higher capital charges on the largest banks, deeming them Global Systemically Important Banks, or G-SIBs. This limits their ability to buy back shares. JPMorgan is now subject to a minimum Tier 1 capital ratio of 11.2%. PNC faces a minimum capital ratio of 7.4% and its ratio of 9.6% in the second quarter greatly exceeds that.
This gives PNC the ability to pay a large dividend and buy back a significant amount of stock. The bank is on track to buy back more than $3 billion of stock this year, or about 4% of its market value, and return almost all of its profits to holders in the form of dividends and share buybacks. shares.
The big risk for banks is a recession, and fears of a recession have depressed stocks this year. PNC is poised for a downturn, having comfortably passed the Fed’s stress test which simulates a severe economic downturn.
Demchak was unavailable for comment. On the bank’s conference call last month, he said action by the Fed to control inflation would be harder to achieve and would take longer than many market participants had assumed. “But regardless of the macro path forward, we believe that a strong balance sheet, strong mix of revenue-generating businesses, continued focus on expense management and differentiated organic growth strategies will continue to form the foundation. of our success,” said the CEO.
Given its large asset base and $71 billion market value, PNC is unlikely to become a takeover candidate, especially given the tough antitrust approach taken by the Biden administration. If an agreement was possible,
Goldman Sachs Group
(GS) might be interested. PNC would strengthen its retail and corporate banking business.
Pittsburgh-based PNC has grown over the past 15 years through acquisitions and organically. The company bought BBVA with proceeds from the sale of a long-standing 22% stake in
(BLK), the world’s largest asset manager, in May 2020. PNC paid around 1.3 times the tangible pound for BBVA, a relatively low price. The strength of PNC’s systems and back office was evident in the rapid integration of the BBVA agreement.
The PNC has sufficient capacity to grant new loans, given that its loan-to-deposit ratio is only 68%. It has “a lot of dry powder,” Mayo says.
The bank derives about 60% of its revenue from net interest income and the rest from a combination of fee-based businesses, including asset management, capital markets and corporate cash management. Like other banks, PNC is getting rid of consumer fees and eliminated overdraft fees on consumer accounts earlier this month.
A well-managed bank, PNC offers a good dividend yield and a healthy outlook.
Write to Andrew Bary at [email protected]