PNC Financial Services Group
is one of the best-positioned regional banks in the U.S. It has the scale to compete with industry leaders like
Bank of America
but isn’t burdened with the stiff capital requirements of the banking giants.
At a recent $173, PNC shares (ticker: PNC) also look appealing, having fallen more than 20% from a record $228 earlier this year. The stock trades for 12 times projected 2022 earnings and yields 3.5%. The bank lifted its quarterly dividend by 20%, to $1.50 a share, in April, and another increase is expected next year.
With its acquisition in 2021 of the U.S. banking operations of the Spanish bank
PNC now has a presence in all of the top 30 markets in the U.S. It calls itself a national Main Street bank. CEO Bill Demchak, 59, who has run the bank for nine years, is considered one of the country’s better banking executives.
PNC’s second-quarter earnings rose 30% from a year ago, to $3.42 a share. Revenue was up 10% while noninterest costs increased 6%, resulting in favorable operating leverage. Like its peers, PNC is seeing an expansion in net interest margins as the Federal Reserve lifts short rates and credit costs remain historically low. Loan growth was healthy at 5% in the second quarter, and the bank sees 8% growth for the year.
Next year’s earnings are expected to rise 14%, to about $16.50 a share, as margins widen further, even as PNC potentially absorbs higher credit costs.
“PNC has the scale to compete with the biggest banks, but has developed a strong lending niche with middle-market companies across the country and a strong retail banking offering,” says Jason Goldberg, a banking analyst at
Goldberg rates the stock Overweight, with a $222 price target.
“PNC is over-indexed to Main St. banking and commercial-lending tailwinds, under-indexed to weaker Wall St. banking headwinds, and likely a leader among banks,” wrote Mike Mayo, a banking analyst at Wells Fargo, after the bank reported second-quarter results in mid July.
Mayo told Barron’s that the banking industry is seeing “the best commercial loan growth in 15 years. That’s PNC’s bread and butter. PNC is showing expense control and still-strong credit quality.”
He has an Overweight rating and price target of $202.
With $541 billion in assets, PNC is in the same league as rivals
(TFC), but well below the big four banks—JPMorgan (JPM), Bank of America (BAC),
(WFC)—each in the range of $2 to $4 trillion in assets.
Regulators have imposed higher capital burdens on the biggest banks, deeming them global systemically important banks, or G-SIBs. That limits their ability to repurchase stock. JPMorgan is now subject to a minimum Tier 1 capital ratio of 11.2%. PNC faces a 7.4% minimum capital ratio and its 9.6% second-quarter ratio comfortably exceeds that.
That gives PNC the ability to pay an ample dividend and repurchase a sizable amount of stock. The bank is on pace to buy back more than $3 billion of stock this year, about 4% of its market value, and return nearly all its earnings to holders in dividends and share repurchases.
The big risk for banks is a recession, and fears of one have depressed the stocks this year. PNC is prepared to deal with a downturn, having comfortably passed the Fed’s stress test that simulates a severe economic recession.
Demchak wasn’t available for comment. On the bank’s conference call last month, he said the Fed’s moves to control inflation would be harder to achieve and take longer than many in the markets were assuming. “But regardless of the path ahead macroeconomically, we believe having a strong balance sheet, a solid mix of fee-based businesses, continued focus on expense management, and differentiated strategies for organic growth will continue to provide the foundation for our success,” the CEO said.
Given its large asset base and market value of $71 billion, PNC is unlikely to become a takeover candidate, especially in view of the tough antitrust approach taken by the Biden administration. If a deal were possible,
Goldman Sachs Group
(GS) might be interested. PNC would beef up its consumer and corporate banking businesses.
Pittsburgh-based PNC has grown in the past 15 years through acquisitions and organically. The company purchased BBVA with the proceeds of the sale of a longstanding 22% holding in
(BLK), the world’s largest asset manager, in May 2020. PNC paid about 1.3 times tangible book for BBVA, a relatively low price. The strength of PNC’s systems and back office was evident in the quick integration of the BBVA deal.
PNC has ample capacity to make new loans, given that its ratio of loans to deposits is just 68%. It has “a lot of dry powder,” Mayo says.
The bank gets about 60% of its revenue from net interest income and the rest from a mix of fee-oriented businesses, including asset management, capital markets, and corporate cash management. Like other banks, PNC is getting rid of consumer charges, and it eliminated overdraft fees on consumer accounts earlier this month.
A well-managed bank, PNC offers a nice dividend yield and a healthy outlook.
Write to Andrew Bary at [email protected]