Company Reports

Narrow-moat-rated PNC Financial reported decent results in the first quarter as earnings came in at $3.10 per share, compared with FactSet’s consensus estimate of $3.01 per share. Included in the results was an incremental $130 million FDIC special assessment charge related to the FDIC increasing its estimated loss from the March 2023 banking events. We do not anticipate a significant change to our $175 per share fair value estimate as we incorporate first-quarter results.

PNC is one of the larger regional banks in the US, has a fairly diversified fee base, and has a national presence, but is concentrated primarily in the East and Midwest. The bank has grown substantially from acquisitions, transforming itself with the integration of the troubled National City (doubling the size of PNC) in 2008, acquiring RBC’s US branch network in the Southeast in 2012, and more recently picking up BBVA USA in 2021 (a roughly 25% increase in size).

Our thesis on the U.S. banks following the Silicon Bank fallout was that all of the banks we covered, except for First Republic (which we downgraded to a $3 fair value estimate on March 20, 2023, and a $0 fair value on April 27, 2023), would be able to weather the storm. We believed that banks in trouble were in uniquely risky positions. We believe this thesis has largely held up, and sorting through banks based on their unique risk profiles remains necessary and valuable. To the extent that the market is selling off all banks because of what has happened to NYCB, we think there could be opportunities once again while acknowledging the significant time horizon risk (how long does it take for the banks to prove to the market they are fine) and the choppy waters that could occur in the meantime (we expect more commercial real estate related loan losses in the future).

Narrow-moat-rated PNC Financial Services is no longer our preferred investment idea among the regional U.S. banks as the company's share price has rallied around 35% since hitting its 52-week low back in October 2023. We do not plan to materially change our $175 per share fair value estimate for PNC as we fully incorporate the bank's fourth-quarter results. While the company is still trading at around a 15% discount to our fair value estimate, the margin of safety has narrowed substantially the past few months.

Narrow-moat-rated PNC Financial reported middling results in the fourth quarter as earnings came in at $1.85 per share compared with FactSet’s consensus estimate of $2.12 per share. We note that the fourth-quarter results were adversely impacted by an FDIC special assessment charge of $515 million for uninsured deposits of certain failed banks during the banking turmoil in early 2023 and workforce reduction charges of $150 million. Excluding these nonrecurring charges, the bank reported earnings per share of $3.16 per share, which was largely in line with our expectations. The shares of the bank have rallied more than 30% from their October-end lows as the market got excited about the prospects of interest rate cuts by the Fed in 2024. While the bank is not as cheap as it was a few months ago, we still believe there is around a 15% margin of safety for investors. We do not plan to materially change our $175 fair value estimate for PNC Financial as we fully incorporate the fourth-quarter results.

PNC is one of the larger regional banks in the U.S., has a fairly diversified fee base, and has a national presence, but is concentrated primarily in the East and Midwest. The bank has grown substantially from acquisitions, transforming itself with the integration of the troubled National City (doubling the size of PNC) in 2008, acquiring RBC’s U.S. branch network in the Southeast in 2012, and more recently picking up BBVA USA in 2021 (a roughly 25% increase in size).

PNC is one of the larger regional banks in the U.S., has a fairly diversified fee base, and has a national presence, but is concentrated primarily in the East and Midwest. The bank has grown substantially from acquisitions, transforming itself with the integration of the troubled National City (doubling the size of PNC) in 2008, acquiring RBC’s U.S. branch network in the Southeast in 2012, and more recently picking up BBVA USA in 2021 (a roughly 25% increase in size).

Narrow-moat-rated PNC Financial Services provided our first look at earnings from a larger regional bank for the third quarter, reporting mixed results compared with the largest banks that have already reported. Like the largest banks, PNC increased its outlook for full-year net interest income growth (to 7% from 5%-6%) based on next quarter’s guidance. EPS positively surprised by coming in at $3.60, 10% higher than our $3.27 expectation and 16% higher than FactSet consensus of $3.10. Thinking about a read-through for upcoming regional results, we were encouraged that PNC's results did not deteriorate from the mid-September update we got. We were hoping this might be the first quarter where we do not see more negative NII revisions, and PNC’s results support that thesis so far. While the current NII outlook is holding up, the current interest-rate environment will continue to drive up deposit costs, albeit at a slower pace, and we have not reached perfect equilibrium just yet.

Narrow-moat-rated PNC Financial Services, our first look at larger-regional-bank earnings for the June quarter, reported slightly weaker results than the largest banks that have already reported. While the largest banks generally increased their net interest income outlooks, PNC is now projecting growth of 5%-6% for the full year (down from 6%-8% previously), with the decline driven by rising funding costs and slower loan growth. Even so, PNC's results were largely in line with our expectations, with EPS of $3.36 in line with our expectation of $3.31 (and FactSet consensus of $3.29).

The Federal Reserve has released the results of its annual stress tests. Our key takeaway is that the banking system remains well capitalized, and stress capital buffers, or SCBs, are likely to be declining for nearly half of the banks we cover who participated in the test this year. This will bring some capital relief to some key names under our coverage, including JPMorgan, Bank of America, M&T Bank, Goldman Sachs, and Morgan Stanley. Whether or not management teams will actually lower their internal common equity Tier 1 targets is another story. As they await other potential regulatory changes, we expect most would choose to err on the side of holding more capital rather than less. Even so, we would view these banks as the big winners from this year’s stress tests as results are set to give these banks more buffer space for now.

PNC is one of the larger regional banks in the U.S., has a fairly diversified fee base, and has a national presence, but is concentrated primarily in the East and Midwest. The bank has grown substantially from acquisitions. The bank transformed itself with the integration of the troubled National City (doubling the size of PNC) in 2008, acquired RBC’s U.S. branch network in the Southeast in 2012, and more recently acquired BBVA USA in 2021 (a roughly 25% increase in size). PNC has been successful at organically expanding its customer base, both in commercial banking and in 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, and PNC now seems poised to repeat this effort with the acquisition of BBVA. The bank is also attempting to grow its Midwest commercial franchise along with retail growth efforts in the same areas where commercial expansion was successful.

The Federal Reserve released its review of what went wrong with supervision and regulation of Silicon Valley Bank. There are still no official new regulatory proposals, but this is the first official clue about where the regulators are heading. Our thesis was that regulations were going to change but that they would be manageable changes phased in over a period of several years. This is why we do not think capital raises are likely for the banks under our coverage. We think this is a key point because prices currently seem to be implying permanently impaired profitability or capital raises for multiple banks under our coverage. We think this is too harsh.

Narrow-moat-rated PNC Financial Services, our first look at larger-regional-bank results, reported slightly weaker results than the largest banks that have already reported. While the largest banks kept their revenue outlooks intact, PNC is now expecting growth of 4%-5% (down from 6%-8% previously), with the decline driven by a weakening net interest income outlook. We are not surprised to see the market penalize a bank that shows any weakness, but we would caution investors to not overreact. The bigger picture remains that despite the recent banking turmoil, the deposit base remained intact for PNC. While the increment hit to profitability is there, it is expected to be manageable. The bank is still set to increase revenue and NII in 2023, and we would still expect a high-teens return on tangible equity.

We have updated our fair value estimates for a number of regional banks in our coverage (M&T Bank: $179 to $163, Fifth Third Bancorp: $42 to $38, Regions Financial: $21 to $19, KeyCorp: $24 to $21, Huntington: $17 to $15, Comerica: $86 to $79 , Zions: $66 to $58, Cullen/Frost: $133 to $124 ). We did this based on an expectation of increased funding costs, some pressure on deposit bases (in other words, deposit outflows), and potentially lower securities yields in the future due to potential changes in bank regulations (which would likely force banks to hold more short-term treasuries instead of their current preference for mortgage-backed securities).

We are increasing our Morningstar Uncertainty Rating on our U.S. regional banking coverage (excluding U.S. Bancorp and PNC Financial Services) to High from Medium, to reflect the increased uncertainty associated with predicting what the deposit base, funding costs, and regulatory costs will look like in the future. We’re leaving the Uncertainty Ratings on the largest banks unchanged, as we believe they are less likely to experience deposit base volatility.

With the U.S. banking system coming under heightened liquidity pressure, we had speculated that the Federal Reserve might step in and provide some sort of solution. There was a lot of speculation about what mechanism/s could be used, and one of our favorites was simply allowing banks to exchange their underwater securities, at par, with the Fed. This has the benefit of taking away any concerns about being forced to sell these securities at fair value and therefore taking a hit to capital while also exposing the U.S. taxpayer to minimal risk of loss, as most securities held by the banks are either agency-backed MBS or Treasuries.

Bank stocks sold off meaningfully on March 9 as Silicon Valley Bank announced that it would have to take a number of “strategic actions,” including selling off its entire available-for-sale securities portfolio (incurring a $1.8 billion aftertax loss, or roughly 15% of the bank’s tangible common equity as of Dec. 31, 2022), announcing it is seeking to raise $2.25 billion in additional capital, and increasing its use of “term borrowings” (essentially higher-cost but more stable funding). Aside from crypto-related meltdowns, this is one of the first banks we’ve seen that has really suffered a liquidity crunch that has forced it to restructure the balance sheet and realize losses on its securities portfolios.

PNC is one of the larger regional banks in the U.S., has a fairly diversified fee base, and has a national presence, but is concentrated primarily in the East and Midwest. The bank has grown substantially from acquisitions. The bank transformed itself with the integration of the troubled National City (doubling the size of PNC) in 2008, acquired RBC’s U.S. branch network in the Southeast in 2012, and more recently acquired BBVA USA in 2021 (a roughly 25% increase in size). PNC has been successful at organically expanding its customer base, both in commercial banking and in 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, and PNC now seems poised to repeat this effort with the acquisition of BBVA. The bank is also attempting to grow its Midwest commercial franchise along with retail growth efforts in the same areas where commercial expansion was successful.

Narrow-moat-rated PNC Financial Services reported fourth-quarter earnings of $3.47 per share, missing the FactSet consensus of $3.95 and well below our estimate of $4.19. Total revenue came in at $5.76 billion, ahead of our estimate of $5.67 billion, with net interest income, or NII, coming in on the low end of management's guidance while fees outperformed.

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 the acquisition of BBVA USA (a roughly 25% increase in size). PNC is now the second largest regional bank in the United States. PNC has been successful at organically expanding its customer base, both in commercial banking and in 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, and PNC now seems poised to repeat this effort with the acquisition of BBVA. The bank's Midwest commercial growth strategy is paying dividends, and PNC is now attempting retail growth efforts in the same areas where commercial expansion was successful as well as commerical optimization within the BBVA footprint.