PNC Earnings: Funding Pressure Remains, but Smaller Changes to Outlook

PNC Financial Services Group Stock at a Glance

• Fair Value Estimate: $175.00
• Morningstar Rating: 4 stars
• Morningstar Uncertainty Rating: Medium
• Morningstar Economic Moat Rating: Narrow

PNC Financial Services Group Earnings Update

In our first look at the earnings of larger regional banks for the June quarter, PNC Financial Services PNC reported slightly weaker results than what the largest banks have already reported. While those banks generally increased their outlooks for net interest income, PNC is 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 expectations, with its earnings per share of $3.36 close to both our forecast of $3.31 and the FactSet consensus of $3.29.

What was of most interest to us this quarter was the revision to the bank’s NII outlook; the midpoint of guidance declined 500 basis points last quarter, compared with a decline of 150 basis points this time around. While we’re not completely done with the current rate cycle, we are seeing a deceleration in surprises as we approach some sort of equilibrium. Overall, deposit costs roughly tracked our updated expectations, as did deposit balance declines and the shift into interest-bearing balances.

While results will certainly be bank-specific, our read is that while regionals will face more pressure on NII than the largest banks, the pressure is falling in line with updated expectations rather than leading to dramatic negative revisions like we saw last quarter. The bigger picture remains: Despite the recent banking turmoil, PNC’s net interest income and revenues are still set to grow this year, and the bank is still able to produce a midteens return on tangible equity, even after adjusting for accumulated other comprehensive income.

As we adjust for a slightly lower NII outlook, a slightly worsening fee outlook, and the possibility of higher capital requirements, we may slightly decrease our current fair value estimate of $175 per share, although even in that case we’d still view the shares as undervalued.