2023-07-19 12:37:21 ET
Summary
- PNC Financial is trading higher following the Q2 earnings release, but the share price performance is lagging the broader regional index.
- As one of the first major regionals to report, PNC turned in promising data surrounding deposits and credit quality.
- Though guidance was lowered, I don't believe this will be isolated to PNC.
- For investors seeking a regional addition into their long-term portfolios, I continue to view PNC positively, despite the more challenging operating environment.
In prior coverage of PNC Financial Services ( PNC ), I highlighted the stock as a “buy” due to their attractive valuation and the growth rate of the dividend payment.
Much has changed since that report, which was prepared near the middle of 2022. This includes a vastly different rate and macroeconomic environment. And as one consequence of the former, investors have increased their skepticism on the regional cohorts due to the banking failures earlier in 2023.
Accordingly, shares in PNC since my last update are down over 17%. This compares to a gain of about 12.5% in the broader S&P 500 ( SPY ). Despite the significantly changed operating environment, I remain bullish on PNC. And even more so now following the steep pullback over the last year. For investors seeking selective regional additions to their long-term portfolios, I continue to view PNC positively following their Q2 results.
PNC Q2 Results
The stock is a day fresh from their Q2 earnings release . Reported revenues were up 3% to +$5.3B. This compares to estimates of about +$5.4B. Though net income was flat from the same quarter last year at +$1.5B, overall earnings of $3.36/share beat the consensus by $0.08/share. The company did, however, lower their earnings forecast for the year due to higher deposit costs and weaker loan growth.
On average, PNC is paying a quarter percentage point more on deposits than they were last quarter. Currently, the rate is just under 2%. This is up from a near 0% rate last year.
Overall metrics remain largely in-line, though net charge-offs for commercial real estate loans did jump to +$87M during the quarter. For perspective on the extent of the jump, charge-offs were +$10M last quarter and just +$4M last year. One factor driving the spike was office real estate, according to commentary from CFO, Robert Reilly.
Market Reaction To PNC’s Q2 Earnings Release
Though shares dropped 3.1% in premarket trading immediately following the release, the stock closed 2.5% higher on the day. While positive, the share price performance did underperform the other banking names.
Truist Financial Corporation ( TFC ), a regional peer, closed higher by 3.2%. And the KBW Nasdaq Regional Banking Index was up 4.1% on the day. The larger and more diversified banking group were up to an even greater extent.
PNC is still down over 15% for the year, with YTD losses in the neighborhood of 18%.
Seeking Alpha - Basic Trading Data Of PNC
Key Takeaways Of PNC’s Q2 Results
Deposit Outflows Less Bad Than Feared: During the quarter, deposits declined just 2%. Compared to their larger and more diversified banking peers, regionals such as PNC are more exposed to outflow risk. Given the rate environment, with interest-bearing accounts elsewhere providing about 2%-3% above the rate offered by PNC, it may come as a surprise, then, that outflows were limited to just 2% during the quarter.
Moreover, the mix was driven by commercial deposits as opposed to consumer. In Q2, commercial non-interest-bearing deposits accounted for 45% of total commercial deposits compared to 47% in Q1. On the consumer side, on the other hand, the non-interest-bearing mix remained stable at 10%.
PNC Q2FY23 Investor Presentation - Summary Of Deposit By Mix And Consolidated
Credit Metrics Remain Strong: Leading indicators show that credit quality is proving to be better than expected. Nonperforming loans, for example, declined 5% on a sequential basis. And they're down 7% YOY. As a share of total loans, nonperforming has a share of less than 1%.
Furthermore, delinquencies continue to trend downwards after hitting a recent peak in September 2022. This metric is down 20% YOY and 9% from last quarter.
PNC Q2FY23 Investor Presentation - Summary Of Delinquency Rate By Quarter
One area of concern remains commercial real estate, and, specifically, the office category. Here, charge-offs increased during the quarter. Additionally, much of the reserves being taken are focused toward this category. At present, the category is about 10%-11% reserved. And it’s likely the reserves will need to be tapped, as offices are expected to be a continued concern moving forward.
Continued Capacity For Dividend Growth: Increased capital requirements from a regulatory perspective is one threat against PNC’s dividend growth. But to date, PNC has maintained an adequate buffer. At quarter end, their estimated CET1 ratio stood at 9.5%. This remains above the range targeted prior to the COVID-19 pandemic of 8.5% to 9%.
And the buffer improved to the regulatory minimum level of 2.5%. This in turn enabled a 3.3% increase in their quarterly dividend to $1.55/share. The dividend payout is now growing at a three-year compound rate of nearly 10%. This compares to a sector median of 6.3%.
Is PNC Stock A Buy, Sell, Or Hold?
As the first big regional to report, PNC offered glimpses of what’s likely to come from others soon to report. One of the key line items that was on watch was deposits, given the outflow risk associated with the higher rate environment.
For their part, PNC showed that deposit outflows weren’t nearly as bad as feared. With alternative high-yielding accounts providing about 2% more than what PNC is currently offering, it’s surprising, yet positive, that deposits only declined by 2% over the quarter and are down just 3% from last year.
Granted, the company did lower its earnings forecast due in part to higher deposit costs. But other regionals also have made similar revisions since the first quarter. Though the bank lowered guidance in other areas as well, such as in revenues and net interest income, as compared to the largest banks, which mostly increased their outlooks in these areas, I don’t expect these negative revisions to be isolated to PNC from a regional perspective.
At a price/book of just above 1.0x, I still view PNC as an attractive buy, with upside potential of about 10% based on an estimated price/book of about 1.15x. This is despite the more challenging operating environment.
Outflows, for one, haven’t been as significant as feared and their financial position has exceeded regulatory requirements, which has allowed PNC to maintain an attractive dividend growth rate in relation to their peers. The outlook for commercial real estate is less promising, but this is offset by improving credit quality elsewhere.
For investors seeking banking diversity in their long-term portfolios, PNC remains one quality candidate for consideration.
For further details see:
Is PNC Stock A Buy Following Q2 Earnings? Deposit Resiliency Keeps Shares Attractive