PNC Financial Third Quarter Profits Swell as Loan Provisions Shrink; Target Price $138 in Best Case

PNC Financial Services Group Inc, an American bank holding company and financial services corporation, said its profit rose in the third quarter, largely driven by a lower provision for credit losses and higher noninterest income.

The company said its net income from continuing operations was $1.5 billion, an increase of $2.3 billion driven by a lower provision for credit losses and higher noninterest income. Total revenue increased 5% to $4.3 billion, an increase of $205 million.

“Expenses were well-controlled again in 3Q, a story that looks to continue. With its substantial excess capital position, PNC is expected to take advantage of opportunities to add to its franchise, but time will tell what might come available. We raise our ’21 EPS est. to $8.25 (from $7.15) but ’22 moves to $9.75 (from $10.45), mostly on charge-off/provision timing but with higher PPNR,” said Ken Usdin, equity analyst at Jefferies.

The diversified financial services organization reported a net interest income of $2.5 billion decreased $43 million, or 2%, as lower yields on loans and securities and a decline in loan balances more than offset the benefit of lower rates on deposits and borrowings.

PNC Financial reported that its net interest margin decreased 13 basis points to 2.39% reflecting the impact of higher balances held with the Federal Reserve Bank and lower yields on loans and securities partially offset by lower rates on deposits and borrowings.

At the time of writing, PNC Financial shares traded 0.30% higher at $109.01 on Thursday; however, the stock is down about 30% so far this year.

Executive comments

“PNC delivered solid third-quarter results against the backdrop of a continuing uncertain economy. Noninterest income increased, expenses were well managed, and we continued to generate positive operating leverage. Deposits grew while loans declined as a result of lower commercial loan utilization rates, despite growth in loan commitments,” said Bill Demchak, PNC Chairman, President and Chief Executive Officer.

“Our provision for credit losses was significantly less than last quarter, reflecting stable reserve levels. We continue to execute on our strategic priorities, including ongoing investments in our national expansion and digital offerings. We have substantial capital and liquidity flexibility and remain well-positioned to take advantage of potential investment opportunities to enhance shareholder value.”

PNC Financial stock forecast

Twelve analysts forecast the average price in 12 months at $117.64 with a high forecast of $138.00 and a low forecast of $83.00. The average price target represents a 7.95% increase from the last price of $108.98. From those 12 equity analysts, five rated “Buy”, five rated “Hold” and two rated “Sell”, according to Tipranks.

Morgan Stanley target price is $109 with a high of $154 under a bull scenario and $79 under the worst-case scenario. PNC Financial Services Group had its price objective raised by equities researchers at Credit Suisse Group to $117 from $115. The brokerage currently has a “neutral” rating on the financial services provider’s stock.

Several other analysts have also recently commented on the stock. Keefe, Bruyette & Woods cut shares of PNC Financial Services Group to a “market perform” rating from an “outperform” rating and decreased their price target to $127 from $130. Oppenheimer reissued a “hold” rating. JP Morgan Chase & Co. raised their price objective to $120 from $110 and gave the company an “overweight” rating. Zacks Investment Research cut shares from a “hold” rating to a “sell” rating and set a $118 price objective on the stock.

Analyst Comments

“PNC generated $6B in capital from sale of BLK stake. What’s next? Bank M&A is now a key debate for the stock, especially as excess capital and liquidity pressures returns near term. We stay on the sideline as shares already largely reflect the value creation we believe an accretive deal could deliver. PNC going national with multiple initiatives. Middle market C&I expansion well underway, includes 8 new markets in 2017-2019 and 2 additional markets in 2020,” said Betsy Graseck, equity analyst at Morgan Stanley.

“Funded by national retail digital strategy. M&A could accelerate this growth. Excess capital provides valuable hedge, giving PNC optionality regardless of the economic environment,” Graseck added.

Upside and Downside Risks

Upside: 1) Accretive acquisition completed sooner than anticipated. 2) Economic growth rebounds in 2H20. 3) Long end rates rise faster than expected. 4) Lower than expected credit losses – highlighted Morgan Stanley.

Downside: 1) PNC sits on excess capital for longer than expected. 2) Macro environment remains challenging through 2021. 3) Higher than expected credit deterioration. 4) 10-year yield below expectations. 5) Loan growth decelerates.

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