Solid Balance Sheet Aids PNC Financial (PNC), High Costs Ail
The PNC Financial Services Group, Inc.’s PNC strategic initiatives and solid balance sheet are expected to keep supporting its financials. Also, sustainable capital distributions are a positive. However, an elevated cost base and commercial loan concentration are concerning.
PNC Financial enjoys a strong balance sheet position with loan and deposit balances rising over the years. In October 2023, capitalizing on growth opportunities, the company acquired loan commitments from Signature Bank worth approximately $16 billion. Going forward, management expects that the acquisition will be accretive to earnings per share (EPS), with fourth-quarter 2023 EPS seeing an accretion of around 10 cents.
The company expects average loans to rise around 3% sequentially. Our model estimates total loans and deposit balances to inch up at a compound annual growth rate (CAGR) of 1.5% and 0.8%, respectively, over the next three years (ended 2025).
PNC Financial remains committed to strengthening its business through strategic initiatives. Notably, in 2022, the company closed the buyout of Linga, a POS and payment solutions firm, in a bid to expand corporate payments capabilities in the hospitality and restaurant industry space. Thus, its bottom line is likely to get further support, if it continues to make planned investments and diversify its business mix.
PNC continues to progress with its capital distribution strategy. In the third quarter of 2023, the firm returned $0.6 billion of capital to shareholders by way of dividends on common shares. Also, it has 46% of its 100 million repurchase plan as of Sep 30, 2023. Given the company’s earnings strength, its capital-distribution activities seem sustainable and might stoke investors’ confidence in the stock.
However, PNC’s non-interest expenses have witnessed a four-year CAGR (2018-2022) of 6.3%. Going forward, a rising expense base on inflationary pressures and investments in technological advancements are likely to continue affecting the bottom-line growth. Management expects adjusted non-interest expenses to rise 3-4% in fourth-quarter 2023 on a sequential basis. We estimate the metric to grow 1% to $13.31 billion in 2023.
Despite the company’s NII rising over the years, higher funding costs are expected to affect NII going forward. Hence, moving ahead, a decline in NII might impede its top-line growth to some extent. Accordingly, management expects the metric to inch down 1-2% sequentially in the fourth quarter of 2023. Though we anticipate the metric to rise 6.6% in 2023, it will dip 3.8% in 2024.
The majority of PNC Financial’s loan portfolio, around 68% of total loans as of Sep 30, 2023, comprises total commercial loans. The current rapidly changing macroeconomic backdrop may put some strain on commercial lending. Thus, lack of loan portfolio diversification is likely to hurt the company’s financials if the economic situation worsens.
Shares of this Zacks Rank #3 (Hold) company have fallen 9.3% against growth of 2.3% recorded by the industry over the past year.
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Finance Stocks Worth Considering
A couple of better-ranked stocks from the banking space are JPMorgan Chase & Co. JPM and Park National Corporation PRK. Each stock currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
JPM’s earnings estimate for 2023 has been revised 4.6% upward over the past 60 days. In the past three months, its shares have increased 8.5%.
The Zacks Consensus Estimate for PRK’s current-year earnings has been revised 6.2% upward over the past 30 days. Its shares have gained 22.5% in the past three months.
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