EUR 850.00 For Business Accounts Only

Morningstar | Strong Loan Growth for PNC Should Help Balance Out Rate Pressures in 2019. See Updated Analyst Note from 18 Jul 2019

Narrow-moat rated PNC Financial Services posted good second-quarter results as the bank grew its balance sheet and profitability despite an uncertain operating environment. Revenue was up 2.6%, with a bigger boost coming from net interest income rather than from noninterest income. Earnings per share grew 5.9% to $2.89 on 1.3% net income growth, magnified by share repurchases over the preceding year. Slow revenue growth but decent EPS growth from share repurchases is a consistent theme we are seeing across the banking space this earnings season. PNC's return on tangible equity also came in at 14.8%, generally in line with our expectations.

The bank's expansion into new MSAs appears to be going well, as PNC produced a staggering 8% in commercial loan growth this quarter, led by growth in financial services and warehousing loans. Though these loan categories are growing off a small base, we believe the logistics business has a long growth runway as e-commerce continues to expand. PNC’s cost of interest-bearing deposits grew a reasonable 5 basis points, which reduced net interest margin, but we think PNC has done a reasonable job at slowing deposit cost growth while also balancing its digital expansion initiatives. Noninterest expenses were also under control, growing just 1%. Management reiterated its revenue guidance even while incorporating two rate cuts, which gives us confidence in its ability to generate positive operating leverage despite a challenging environment. We are now incorporating three rate cuts into our base-case forecast through 2020. As a result, we are decreasing our fair value estimate to $130 per share.

PNC’s credit quality remains pristine. Net charge-offs remained flat at 24 basis points during the second quarter, and although nonperforming loans grew, delinquencies declined. We expect that credit costs will roughly double over the medium term as credit costs normalize, particularly in commercial real estate and HELOC loans.