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Morningstar | PNC Sees Only Modest Loan Growth; Expenses Continue to Grow in Line With Revenue

No-moat-rated PNC Financial Services reported decent third-quarter results, which fit within our overall thesis for the company. However, after a few adjustments, mainly for more tempered loan growth as well as lower final leverage ratio assumptions, we are decreasing our fair value estimate to $134 per share from $139.

While many will focus on the less-than-enthusiastic loan growth comments from management, we note that loan growth was still positive overall, and given the current stage of the credit cycle, we would rather a bank be more cautious and lose out on some growth as opposed to being aggressive simply to maintain growth. We can also appreciate that nonbank players are taking share, which seems to be a pattern that plays out every cycle. Ultimately, when the cycle turns, the prudent players will be rewarded, and given the bank’s history, we would expect PNC to remain prudent.

Another item that stuck out to us was expense management. Many banks are seeing improving efficiency ratios and flat to down expenses, while PNC saw expenses increase in line with revenue increases. Part of the increase in expenses is related to increased advertising expense, at least partially related to the bank’s branch-light expansion into new markets. If the branch-light expansion is successful, it would result in a lower overall expense base for revenue, so this does not seem to be a negative to us. Other aspects of the expense increases were related to technology spending and higher head count. Overall, we would rather see a bank investing heavily in technology now than fall behind in the future, as we believe technology will be a primary differentiator over the longer term for the banking industry.

Provisioning remained range-bound, and net interest margins continued to expand. Overall, we still see some room for further net interest margin expansion for the banks in general and for PNC specifically. This should continue to boost profitability over the medium term.