PNC Earnings: Funding Pressure Is Increasing, but Should Be Manageable

PNC Stock at a Glance

• Fair Value Estimate: $175.00
• Star Rating: 4 Stars
• Uncertainty Rating: Medium
• Economic Moat: Narrow

PNC Earnings Update

Narrow-moat-rated PNC Financial Services PNC, 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 , or NII, 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.

PNC Profitability Under Short-Term Pressure

Overall, we think current results support our thesis that while profitability is set to face some pressure in the short term, in the longer term it will not be destroyed. We can’t read too much through to the smaller regionals just yet, but if PNC is indicative of a trend related to bank size, we could see some more pressure for the smaller banks than what we saw for the largest banks.

Even so, we think the market is more than pricing this in, and we view the sector as undervalued. As we incorporate slightly more pressure on NII and slightly higher deposit costs, we expect our fair value estimate of $175 to decline by a low- to mid-single-digit percentage, and we would still view shares as undervalued. Going into earnings, we believed that U.S. Bancorp and Truist were more undervalued than PNC among the mega-regionals, but PNC remains undervalued on an absolute basis as well.