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Morningstar | PNC Starts 2019 on a Positive Note as Revenue Growth Outpaces Expense Growth

PNC has transformed itself since the financial crisis, with the integration of the troubled National City (doubling the size of PNC), the acquisition of RBC’s U.S. branch network in the Southeast, and by updating its core infrastructure and retail branch model. PNC has been very successful at organically expanding its customer base, largely in commercial banking, although some of the focus has now shifted back to retail. The 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 particularly well, and noninterest income now makes up roughly 45% of net revenue. The bank's Midwest commercial growth strategy is paying dividends, and PNC is now testing retail growth strategies in the same areas where commercial expansion was successful. The latest expansion markets for the bank include Boston and Phoenix in 2019, after PNC expanded into Denver, Houston, and Nashville in 2018.These factors, in addition to the bank's solid credit history, lead us to believe PNC is one of the better operators we cover. 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 to stay ahead on the technology front. As more and more retail transactions go through digital channels and commercial margins improve in the markets PNC's newer markets, we expect improving operating efficiency for the bank. While a significant portion of increased profitability over the past five years has come from declining credit costs, an area without much more room to run, we don't see evidence of a turn in the credit cycle yet. We argue that the overall story is positive for banks, and for PNC specifically, and forecast continued growth of asset management income as well as corporate and consumer services fees. Overall, we like PNC’s focus on technology, its branch network, and its history of prudent lending and believe that these factors should lead to continued solid returns.