What to Expect from PNC Bank Earnings With Widening Net Interest Margin

PNC Financial report third quarter warnings before the market Friday along with JPM, Wells Fargo and Citigroup.  Last quarter $PNC’s net income was $1.5 billion, or $3.39 per diluted share topped Wall Street’s average EPS estimate of $3.14. Revenue topped $5.1 billion, up 10% from the second quarter of 2021 on higher net interest income, which increased 18%. Analysts expected revenue to range between $5.05 billion to $5.18 billion. PNC stock fell to $147.26 −3.70 (- 2.45%) with nerves about the US economy going forward.

pnc bank atm

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

$3.71 Expected AND $5.41 Billion Revenue Forecast

PNC Earnings Preview

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

  • Projected EPS: $3.71
  • Projected revenue: $5.41 billion

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.

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).

Higher rates increase margins

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.

PNC Q2 2022 Recap

Q2 2022 earnings before the bell; conference call at 10 a.m. ET Friday

  • Second quarter earnings 2022 net income of $1.5 billion, or $3.39 per diluted share. That compares with profit of $1.1 billion, or $2.43, during the same quarter in 2021, and topped Wall Street’s average EPS estimate of $3.14.
  • Total revenue topped $5.1 billion, up 10% from the second quarter of 2021, as PNC cited higher net interest income, which increased 18%. Analysts expected revenue to range between $5.05 billion to $5.18 billion.
  • Average loans for the three months ended June 30 were $304.8 billion, a 19% increase over 2021 that was driven primarily by growth in PNC’s corporate banking and business credit businesses.
  • Average consumer loans jumped 22% year-over-year, but the bump-up was just 2% compared with the first quarter.
  • Average total assets were $544 billion, compared with $504.4 billion for second-quarter 2021, largely due to BBVA, PNC said. Still, assets slipped from $550.1 billion in the first quarter of 2022.
  • Noninterest expenses, at $3.2 billion, rose 6% from a year ago with increases in personnel and occupancy, as well as a 28% jump in PNC’s marketing spend

Bill Demchak, chairman, president and CEO, called it a “very strong” quarter.

“Loan growth exceeded our expectations, both net interest income and net interest margin increased meaningfully, fees rebounded and expenses remained well controlled,” Demchak said in PNC’s earnings release. “We’re gaining traction across our expanded footprint and are confident that our capital levels and strong credit quality position us for continued success.”

The acquisition of BBVA USA Bancshares was the biggest driver of balance sheet growth this year. PNC closed the acquisition June 1, 2021. The acquisition increased the loan portfolio size by around $66 billion or 27%.

PNC now has a low-fee bank account that has received certification from the Cities for Financial Empowerment (CFE) Fund. The account will only charge customers $5 per month and have no charges for overdrafts or insufficient funds.

BBBA and BlackRock

In the second quarter of 2020 PNC sold their passive equity stake in BlackRock. In November, announced their plan to redeploy those proceeds to acquire BBVA USA. PNC in November said it would acquire the U.S. banking operations of Spain’s BBVA for $11.6 billion cash, making it the biggest regional bank by assets under management in the U.S. The transaction closed June 1, 2021, and increased PNC’s total assets by an estimated $102 billion, creating the fifth largest bank by assets.

Overall linked quarter balance sheet growth was driven by the acquisition, of course, which contributed $60 billion in loans, $18 billion of investment securities, and $82 billion of deposits at quarter end. Excluding those additions during the quarter, legacy PNC loan balances declined $3 billion, investment securities increased $10 billion and deposits declined by $4 billion, and I’ll cover the drivers in more detail over the next few slides. We ended the quarter with a tangible book value of $93.83 per share and an estimated CET 1 ratio of 10%, substantially above the levels we anticipated at the time of the deal announcement. As a result, we’re well-positioned with significant capital flexibility. – Rob Reilly — Chief Financial Officer

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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