PNC Earnings: Some Fee Weakness, but We Like Net Interest Income Results

Key Morningstar Metrics for PNC Financial Services

• Fair Value Estimate: $175.00
• Morningstar Rating: 5 stars
• Morningstar Economic Moat Rating: Narrow
• Morningstar Uncertainty Rating: Medium

What We Thought of PNC Financial Services’ Earnings

PNC Financial Services PNC provided our first look at earnings from a larger regional bank for the third quarter, presenting mixed results compared with the largest banks that have already reported. Like those banks, PNC increased its outlook for full-year net interest income growth (to 7% from 5%-6%) based on next quarter’s guidance. Earnings per share positively surprised us, coming in at $3.60, which was 10% higher than our $3.27 expectation and 16% higher than the 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.

Despite the good news on NII, revenue was lower than we expected. The main weakness was lower fees, and the main weakness for fees was capital markets. Those fees are cyclical, and it remains a difficult environment, so we would not read too much into the results. Eventually, this line item will recover.

As we factor in these results, we expect to slightly decrease our revenue forecast, but we do not expect a material change in our $175.00 fair value estimate. We believe PNC remains undervalued. While there will be continued headwinds for the banking sector, including slowing loan growth and elevated funding costs, we think PNC is well-positioned to deal with them.