Summary
PNC's credit/tax-driven beat failed to impress the Street, and investors were more concerned about the slowing loan growth and higher expenses.
PNC's organic growth plans for its commercial and retail banking businesses are sound, but will require ongoing spending to support and that isn't what short-term investors want to see/hear.
PNC looks attractive as a long-term holding, but investors need to be aware of the shorter-term cyclical risks to the sector and the possibility of further de-rating.
Earnings beats driven by credit quality and lower tax rates aren’t going to get the job done anymore, and investors are increasingly worried about the lackluster pace of loan growth and the shrinking impact that higher rates are likely to have on spread margins. Add in some concerns about the extent to which growth is now tied to ongoing spending, and I can understand why PNC(PNC) shares sold off after third quarter earnings.
Understanding is not quite the same as agreeing, though. I do have concerns about where we are in the cycle, and I think it’s going to be harder to generate outsized gains with banks at this point. That said, PNC is a high-quality bank and I think investors will do well by management’s disciplined growth strategy. Although I’ve expanded my fair value range to account for more uncertainty, a mid-$130’s to mid-$140’s range still offers worthwhile upside for a bank that I expect to be a long-term winner.
