PNC Financial Aided by Expansion Strategies Amid Higher Expenses
The PNC Financial Services Group, Inc. PNC remains well-poised for growth on the back of balance sheet strength and strategic growth initiatives. Furthermore, the recent rate cut by the Federal Reserve is expected to bolster its net interest income (NII) growth. However, a mounting expense base and concentrated loan portfolio remain woes.
Key Growth Drivers for PNC
Balance Sheet Strength: PNC Financial benefits from a strong balance sheet position. Total deposits and loans have witnessed a four-year (2019-2023) CAGR of 9.9% and 7.6%, respectively. Although the loan balance declined in the first half of 2024, the deposit balance growth continued in the same period.
Capitalizing on growth opportunities, in October 2023, the company acquired loan commitments from Signature Bank worth approximately $16 billion. This is expected to support loan growth in the upcoming quarters. A well-diversified deposit base will further strengthen its financial position.
Through such strategic moves, PNC positions itself for sustained growth and resilience in a dynamic banking environment.
Fed’s Rate Cut to Aid NII: The bank’s NII has witnessed a four-year (ended 2023) CAGR of 8.7%. The metric declined in the first half of 2024 due to higher funding costs. Nonetheless, repricing of fixed-rate assets and loan growth is expected to support spread income in 2025.
With the Federal Reserve's recent rate cut, the bank’s NII is likely to witness a positive trend as funding costs stabilize. The company expects to witness record NII in 2025.
Strategic Growth Initiatives: PNC Financial remains committed to strengthening its business through strategic initiatives and partnerships.
In May 2024, the bank extended its partnership with TCW Group to offer private credit solutions to middle-market companies. It aims to raise $2.5 billion in investor equity capital for investment in its first year. This partnership will allow the bank to gain a significant share of the expanding private credit market.
In addition to extended partnerships, in February 2024, the bank announced its plans to invest approximately $1 billion to open more than 100 branches and renovate over 1,200 existing locations by 2028. Such efforts will bolster its presence in key locations as well as augment its retail banking business.
Impressive Capital Distribution: PNC Financial continues to progress with its capital distribution strategy. In July 2024, the company sequentially hiked quarterly cash dividends on common stock by 3.2% to $1.60 per share.
Other major banks, including Wells Fargo & Company WFC and The Goldman Sachs Group, Inc. GS, have also raised their quarterly dividends. In July, WFC announced a quarterly common stock dividend of 40 cents, representing a 14.3% increase from the previous payout. In the same month, GS’ board of directors declared a quarterly dividend of $3 per common share, marking a 9.1% increase.
With such an impressive dividend, PNC is likely to stoke its investors' confidence in the stock.
Challenges for PNC
Elevated Expense Base: Steadily rising non-interest expenses are concerns for PNC Financial. The company’s non-interest expenses have witnessed a four-year (2019-2023) CAGR of 7.3%. The non-interest income remained flat in the first half of 2024 compared with the same period in 2023.
The company has undertaken cost-containment measures targeting a total cost reduction of $750 million in 2024 through a Continuous Improvement Program and workforce reduction. However, the bank’s rising expense base due to technological advancement is likely to continue affecting the bottom line in the long term.
Concentrated Loan Portfolio: The majority of PNC Financial’s loan portfolio, around 66.5% of total loans, comprises commercial loans (commercial and industrial and commercial real estate) as of June 30, 2024.
The current rapidly changing macroeconomic backdrop is putting strain on commercial lending. Also, lower occupancy and comparatively high interest rates affect the credit quality of the company’s office real estate loans. Thus, the lack of loan portfolio diversification is likely to hurt the company’s financials if the economic situation worsens.
PNC’s Price Performance & Zacks Rank
Over the past six months, shares of PNC Financial have gained 13.6% compared with the industry’s growth of 5.2%.
Image Source: Zacks Investment Research
Currently, PNC carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
The Goldman Sachs Group, Inc. (GS) : Free Stock Analysis Report
Wells Fargo & Company (WFC) : Free Stock Analysis Report
The PNC Financial Services Group, Inc (PNC) : Free Stock Analysis Report