PNC Earnings: Net Interest Income Pressure Should Be Offset by Recovery In Noninterest Income

Key Morningstar Metrics for PNC Financial Services Group

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

What We Thought of PNC Financial Services Group’s Earnings

PNC Financial Services Group PNC 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 these results were adversely impacted by an FDIC special assessment charge of $515 million for uninsured deposits of certain failed institutions during the banking turmoil in early 2023, as well as workforce reduction charges of $150 million. Excluding these nonrecurring charges, the bank reported earnings of $3.16 per share, which was largely in line with our expectations.

The bank’s shares have rallied more than 30% from their October-end lows as the market got excited about the prospect of the Federal Reserve cutting interest rates 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 as we fully incorporate the fourth-quarter results.

In the quarter, net interest income, or NII, was reported at $3.40 billion, down from $3.42 billion the previous quarter and $3.68 billion in the prior-year quarter. The net interest margin declined to 2.66%, compared with 2.71% the previous quarter, as deposit costs continued to inch upward. NII will continue to be the driving force for banking sector earnings in 2024. Interest rates are now expected to decline this year, putting downward pressure on the NII of asset-sensitive banks like PNC.

PNC’s guidance for the next year’s outlook was mostly in line with our projections. The pressure that NII exerts on returns is expected to be partially offset by recovering noninterest income and controlled expenses.