Summary
- PNC posted a small beat on a core pre-provision profit basis, as a stronger than expected net interest margin and good expense control offset some weakness in fees.
- Management made meaningful additions to reserves, but further additions are likely and PNC isn't likely to see 2019 levels of profitability for a few years.
- PNC's capital looks sufficient for all but some truly terrible economic scenarios, and I think the shares have long-term appeal on that basis.
Time will tell how much pain PNC Financial (PNC) spared its investors through presumably sound underwriting during the good days of the banking cycle, but management is definitely getting ready for the other shoe to drop and warning investors that it may have to increase its reserves even further to cover losses as Covid-19 pushes the U.S. into recession.
Maybe this is obvious, or at least redundant, but the margin of error for modeling banks now is extremely high. It’s unclear when businesses will be able to get back to normal, let alone what the ongoing impact of this shutdown will be in the short term, and the rate and credit cycle was already moving against banks. PNC looks like it will be okay even in a dire scenario, though, and as is the case with most of the quality bank names, the market seems to be pricing in an overly severe scenario today.
Messy Results … But Basically Okay
Measuring bank stocks against sell-side estimates going into the quarter isn’t very helpful, as some analysts didn’t even really try to model the large reserve builds for the quarter, but PNC’s results relative to expectations were a little more complicated on top of that due to differences in how analysts handle certain items like valuation adjustments and gains.
On what I would call a core results basis, PNC revenue fell 1% yoy and 7% qoq, missing expectations by about 2%. Net interest income rose 1% yoy and qoq, beating by around 2% as the company posted a meaningfully higher NIM than the Street expected. NIM declined 15bp from last year, but rose 6bp sequentially, offsetting a small sequential decline in earning assets.
Fee income is where it gets messy; core results by my definition saw a 4% yoy and 10% qoq decline (to around $1.75 billion), about 9% lower than expected. Asset management was weak, and the bank saw lower than expected service charge revenue relative to the movement in deposits.
