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Rising Costs to Hurt PNC Financial's Profits: Time to Sell?

Zacks Equity Research
·4 mins read

The PNC Financial Services Group’s PNC rising cost base due to investment in technology and business infrastructure is likely to impede its bottom-line expansion. Though the company continues to make steady progress toward bolstering its top line, significant exposure to commercial loans remains a concern.

The Zacks Consensus Estimate for its current-year earnings has remained stable over the past 30 days. Currently, PNC Financial carries a Zacks Rank #4 (Sell).

The stock has recorded 11.7% gain over the past three months compared with 3.5% growth for the industry.

PNC Financial’s expenses jumped at a four-year CAGR (2016-2019) of 3.7%, with a marginal drop in 2018. Higher levels of business activity, along with investments in technology and business infrastructure, contributed to this rise. Though the company aims to fund part of its investments through continued improvement-savings program goals ($300 million for 2020) that target cost containment, a rising expense base is likely to erode bottom line in the near term.

Additionally, the company’s loan portfolio consists of nearly 67% of commercial loans. Such high exposure to commercial loans depicts lack of diversification, which can be risky amid a challenging economy and competitive markets.

PNC Financial continues to suspend its buyback plan to enhance liquidity amid coronavirus concerns till the fourth quarter of 2020. Also, its capital deployment activities might not be sustainable as debt/equity ratio and dividend payout ratio are unfavorable compared with the broader industry.

However, with one of the most attractive business mixes in the banking industry, PNC Financial continues to make steady progress toward bolstering its top line. With the gradual change in the rate environment, margin pressure for the bank has eased, though it was down in 2019 due to three Fed interest rate cuts. Further, the company’s fee income depicted upward movement, with a four-year CAGR (2016-2019) of 5.1%.

Also, as of Jun 30, 2020, the company held debt of $47 billion and debt-capital ratio of 0.47, which has been declining over the past few quarters. Therefore, with a volatile time-interest-earned ratio of 3.7 over the past few quarters and a record of consistent earnings, PNC Financial carries low credit risk, and has a lesser likelihood of default of interest and debt repayments if the economic situation worsens.

Key Picks From the Sector

Old Second Bancorp OSBC has witnessed upward earnings estimate revisions for 2020 over the past 60 days. Also, this Zacks #2 Ranked (Buy) stock has lost 6.4% over the past six months. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Independent Bank Corporation IBCP ongoing-year earnings estimates have moved up in the past 60 days. Further, the company’s shares have declined 13.7% over the past six months. At present, it carries a Zacks Rank of 2.

ConnectOne Bancorp CNOB current-year earnings estimates have moved north in 60 days’ time.  Additionally, the stock has lost 13.4% over the past six months. It currently carries a Zacks Rank #2.

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The PNC Financial Services Group, Inc (PNC) : Free Stock Analysis Report
 
Old Second Bancorp, Inc. (OSBC) : Free Stock Analysis Report
 
Independent Bank Corporation (IBCP) : Free Stock Analysis Report
 
ConnectOne Bancorp, Inc. (CNOB) : Free Stock Analysis Report
 
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Zacks Investment Research