PNC Bank Earnings Higher with Widening Net Interest Margin

PNC Financial reported better than expected third quarter earnings before the market Friday along with JPM, Wells Fargo and Citigroup.  $PNC saw net interest income grow 7% to $3.5 billion, driven by higher yields on interest-earning assets and loan growth, partially offset by higher funding costs. Noninterest income fell 11% to $2.07 billion on the back of the acquisition of BBVA USA and higher merger and acquisition advisory fees.

pnc bank atm

PNC Financial Services Group Inc NYSE: PNC · Reported Before Open Friday

$3.78 Beat $3.71 Expected AND $5.5Bil Beat$5.41 billion Revenue Forecast

PNC Earnings

Q3 2022 earnings before the bell; conference call at 10 a.m. ET Friday

  • Net income attributable to common shareholders rose to $1.56 billion,
  • Adj EPS $3.78 (est $3.70) compared with $1.42 billion, or $3.30 a share, a year earlier.
  • Revenue $5.5B (est $5.41B) from $5.20 billion for the prior-year period
  • Non-interest income fell 11% to $2.07 billion on the back of the acquisition of BBVA USA and higher merger and acquisition advisory fees.
  • Provisions for Credit losses $241.0M (est $158.8M) up from $36 million in the second quarter.
  • $PNC Pre-market $153.05+0.080 (0.052%)

In the third quarter of 2021, PNC reported earnings of $3.68 per share, which beat average estimates of $3.22 per share. PNC reported second quarter earnings of $3.42 per share, which beat estimates of $3.14 per share. PNC has delivered eight straight quarters of earnings beats.

Higher rates increase margins

PNC’s Net interest income rose 7% to $3.5 billion, driven by higher yields on interest-earning assets and loan growth, partially offset by higher funding costs.

The brighter outlook for bank profits coincides with higher Treasury yields. The benchmark 10-year Treasury yield has risen dramatically for the year-to-date, with higher interest rates boosting banks income from their core lending businesses.  The bank’s net interest margin, a measure of what it collects on loans minus what it pays for deposits rises with rates.

Banks’ median net interest margin rose in the second quarter of 2022 in comparison to the same period in 2021. Banks are likely to benefit from a significant rise in consumer borrowing at record highs.

Investment Banking Losses

JPMorgan President Daniel Pinto told investors last month that he expected the bank’s investment banking fees to fall between 45% and 50% in the third quarter.

Weakness has been exacerbated by a decline in large private-equity buyouts, dropping 54% to $716.62 billion in the third quarter from the same period last year, according to Dealogic data.

U.S. banks wrote down $1 billion on leveraged and bridge loans as rising interest rates made it tougher for them to offload high-risk debt onto investors and other lenders. Wall Street banks took combined losses of $700 million on the sale of $8.55 billion in loans and bonds backing the leveraged buyout of business software company Citrix Systems Inc, Reuters reported last month, citing a person familiar with the matter.

The Twitter takeover by Elon Musk has been reported to lead to $500 million dollar losses for the financing banks if the deal goes ahead.

“We are expecting further losses on these deals,” said Richard Ramsden, an analyst at Goldman Sachs who oversees research on large banks. “It’s going to vary quite a bit,” depending on where the transactions were initially priced and how much exposure remains, he said.

Accumulated Other Comprehensive Income or AOCI

With higher rates banks having parked park excess funds in government bonds and mortgage-backed securities the losses are pronounced. Both investments have fallen in value sharply this year, which means banks will have to mark down their portfolios accordingly. These losses are reported as changes to “accumulated other comprehensive income,” or AOCI, but the important thing is they draw down capital.

RBC Capital Markets analyst Gerard Cassidy said banks could suffer up to a 10% blow to their capital cushions due to AOCI changes. In itself that’s not so bad, but banks have been writing down their investment portfolios all year. At Citigroup, AOCI losses reduced tangible capital by 23% in the second quarter, according to Cassidy’s research. The third-quarter could deliver more pain because the yield on the 10-year bond rose to 3.83%.

KBW analyst David Konrad estimates JPMorgan could take a $6.7 billion AOCI hit in the third quarter and Citi $4.3 billion. At Citi, the write-down could sufficiently lower capital that the bank must raise cash, Konrad said. The bank may unload $45 billion worth of private equity loans.

Analysts Outlook on Banks

Oppenheimer issued a note generally positive on bank stocks due to cheap valuation. The firm noted that in in two of the last three recessions, bank stocks bottomed relative to the market either at the beginning or well before the recession began.

Oppenheimer’s favorite names are Bank of America (BAC), Citigroup (C), Goldman Sachs (GS), Jefferies (JEF), Morgan Stanley (MS), and U.S. Bancorp (USB).

Citigroup predicts strong earnings beat and share price pop for JPMorgan Chase (JPM) off better-than-expected net interest income. The bank’s guidance for NII is expected to be revised higher as JPM is said to have been more disciplined than others on deploying cash, and now has the opportunity to extend duration at higher rates. The firm also upgraded Bank of New York Mellon (BNY) shares to a buy rating ahead of earnings because of the bank’s relatively lower exposure to loan losses and strong return outlook.

Morgan Stanley in a note warned that inflation plus QT is a recipe for volatility. “Throw in rapidly rising, higher for longer rates and higher capital requirements and you get an accelerating credit cycle” With defense seen as the best offense in the current backdrop, MS recommends leaning into M&T Bank (NYSE:MTB), Regions Financial (RF), Wells Fargo (WFC), and First Republic Bank (FRC).

About PNC

The PNC Financial Services Group, Inc. is one of the largest diversified financial services institutions in the United States, organized around its customers and communities for strong relationships and local delivery of retail and business banking including a full range of lending products; specialized services for corporations and government entities, including corporate banking, real estate finance and asset-based lending; wealth management and asset management. For information about PNC, visit www.pnc.com.

Source: PNC Earnings Release 

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