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Morningstar | PNC Delivers Positive Operating Leverage During the First Quarter of 2019

No-moat-rated PNC posted a solid first quarter, as the bank continues to generate shareholder value through positive operating leverage. After adjusting our model to reflect changing credit spreads on assets and updating our credit cost assumptions, we are increasing our fair value estimate to $135 per share from $134.

The bank grew diluted earnings per share by 7.4% year over year to $2.61, largely due to revenue growth outpacing expense growth. The two big drivers of PNC’s 4.2% revenue growth were the December rate hike, which produced higher net interest margins, and noninterest income growth. We think that most of the benefits from 2018’s rate hikes have already manifested in PNC’s top line, and we anticipate that further top-line growth will generally come from noninterest income, or overall balance sheet growth. We were impressed to see inflationlike growth in noninterest expenses. Year-over-year increases in personnel and marketing expenses were partially offset by a decrease in the FDIC surcharge expense. Looking forward, we will be watching the extent to which PNC can maintain control over expenses in spite of the strong labor market.

Charge-offs as a percentage of total loans increased by 6 basis points from the previous quarter, but we think the overall credit picture remains strong. The increase in credit costs was due to an increase in credit card charge-offs, which is a volatile loan category and simply represents normal seasoning of the portfolio. That said, we think that PNC’s provision for loans losses are more than sufficient for this credit environment. Further, PNC has a history of prudent underwriting, and we remain confident that management would be able to navigate a credit downturn. We will be watching the credit environment closely to see if it continues to worsen.