I think that’s about the worst anyone can say about PNC Financial (PNC) is that it is a conservatively managed bank. With this conservatism, he will never have the fastest loan growth or the greatest asset sensitivity, and he is unlikely to invest large sums in uncertain growth projects. Of course, as the last cycle showed, it’s also not going to self-destruct because aggressively underwritten lending goes “bang” during a downturn.
I’ve liked these stocks for a while, and would describe the stock’s performance since my last update as “lackluster”, and it has underperformed the larger peer banks which have more leverage for self- improvement and economic recovery in 2022/23. Still, relative to where stocks are right now and what other stocks seem to be offering, I find the performance today less compelling, and it’s not the first large-cap bank I’m thinking of buying with money. fresh money.
Unimpressive fourth quarter results
While PNC’s story is largely about what will happen in 2022 and beyond as the company benefits from the Compass acquisition, higher rates and past investments in digital banking and mid-market loan growth, the reality is that fourth quarter results were unimpressive, with poor performance in spread revenue and core operating expenses leading to pre-provision failure.
Revenue was down less than 1% sequentially this quarter, and due to the BBVA-Compass deal, year-over-year comparisons aren’t very helpful. There was a wide range of sell-side estimates for the quarter, with several services reporting starkly different “consensus” numbers. Although PNC’s revenue was a bit better than I expected, compared to the consensus numbers reported, it was between $0.10/share and $1.
Overall, however, there was broader agreement that PNC’s spread income was weak, barely increasing on a sequential basis with disappointing balance sheet growth (lower loan growth) and a slight loss of net interest margin (which was stable at 2.27%). Paid Services was down 2% sequentially, but was still slightly better than expected.
Core operating expenses rose more than 1% quarter-on-quarter, below expectations. Core earnings before provision fell about 4% QoQ, missing expectations of $0.20/share (at least against a set of released consensus estimates).
Reap the benefits of past investments
Things will start to get interesting at PNC in 2022 as the company will see some of its past investment decisions pay off more. Above all, the acquisition of Compass should start to show more significant synergies, providing the company with useful operational leverage.
Spread income should also improve more significantly. Management has been pricing in loan growth of 5% at the end of the period, net of the Compass run-off, but average loan growth could reach double digits, and PNC should benefit from stronger demand for loans to businesses, especially with the years of investment the company has invested in developing new mid-market lending operations in attractive metropolitan areas.
The sensitivity to PNC assets will also be interesting to watch. If you just look at the sensitivity of PNC’s assets in terms of commonly reported leverage to a 100 basis point shock move, you wouldn’t think PNC is so exceptional; indeed, it would seem a little below average. But “one size fits all” metrics like 100bp shock motion sensitivity sacrifice nuance (and in some cases, accuracy) for convenience.
PNC has above-average exposure to floating rate loans, at around 60%, which means this bank will have more to gain as rates start to rise (although this will require several moves, as some loans are already at lower rates). PNC also has above-average cash balances to deploy, whether in the form of loans or securities. Beta deposition is also another area of differentiation. I’m concerned that industry-wide deposit betas will end up being higher than expected in this tightening cycle, but the way PNC has built its operations, including a strong digital banking core and not chasing deposits with above average rate offers, I think they might outperform.
I expect core earnings growth of around 5% (by CAGR) over the next five years and long-term growth above 4% (around 4.5%). Importantly, I believe PNC should post double-digit year-over-year growth in pre-provision earnings for the next three years, which should help boost relative performance. I also think there is more room for reserve releases to boost earnings, as reserves are at around 1.9%, still well above the CECL Day 1 pro forma of 1.6%.
Discounting those earnings, I think PNC is priced to deliver a high single-digit annualized total return, which isn’t bad, but also doesn’t stand out from other quality large-cap banks that I follow. Similarly, other approaches such as the P/TBV (2x) or P/E (13x) based on ROTCE do not flag these stocks as significantly undervalued.
With actions like JP Morgan (JMP), Citizens (CFG), and Truist (TFC) still seems less than fully valued (you can read about those here, here, and here), I don’t necessarily think PNC is the best idea for fresh cash. I’m not saying you should sell PNC, and I still think it’s a great long-term bank, but I don’t think the market is exactly sleeping on the future performance and quality on offer here.