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bgwalker
Summary
The PNC Financial Services Group, Inc. (NYSE:PNC) has been under a lot of selling pressure lately following multiple regional bank failures in the United States. PNC’s share price has declined more than 20% this year, underperforming big bank stocks such as JPMorgan Chase & Co. (JPM), The Goldman Sachs Group, Inc. (GS), Citigroup Inc. (C), and Morgan Stanley (MS). It’s hard to pinpoint the exact reason why PNC has underperformed given the company’s financials appear stable, but it appears in my view this is entirely macro-driven. PNC isn’t going to be another SVB Financial Group (OTC:SIVBQ), First Republic Bank, or Signature Bank (OTC:SBNY) failure for a few reasons:
- PNC deposits grew (modestly) during Q1 2023: We didn’t see a bank run on deposits at PNC. This is a good sign that consumers and commercial entities still have trust in the regional bank.
- 55% of PNC’s total deposits are insured: Additionally, 89% of PNC consumer deposits are insured. According to S&P Global, SVB had ~90% of its deposits uninsured, First Republic at ~67%, and Signature Bank at ~89%. Big difference.
- PNC’s loan book is diversified and expected to remain stable: Slide 22 of the latest investor presentation provides an outlook for the remainder of 2023.
- U.S. Regional Bank ETFs might play a role: The iShares U.S. Regional Banks ETF (IAT) has PNC as its largest holding at 14%. Authorized participants who manage the exchange-traded fund, or ETF, must buy/sell PNC when ETF shares are created/redeemed. This may have put undue selling pressure on PNC as investors sold the iShares U.S. Regional Banks ETF dating back to the start of the banking crisis in March. IAT is down more than 30% YTD.
- PNC is managing its duration well: Slide 13 in the latest investor presentation reveals PNC has been managing its investments through high-quality short-duration securities. The securities portfolio has an average duration of 4.3 vs. SVB which had an HTM security average duration of 6.2. PNC is also leveraging fixed receive swaps to manage interest rate risk.
Given PNC’s share price performance YTD, I believe there may be an opportunity for investors to earn excess return relative to the S&P 500 (SP500). My $145/share target is based on the following:
- 2023 EPS of $14.50: this is based on a blended average of 1) estimates from 20 Wall Street analysts and 2) annualizing Q1 2023 net income, which equates to $6.52 billion (this implies an EPS of $16.33, well above current estimates)
- A P/E multiple of 10x: This is well below S&P 500 historical averages. PNC has traded above 10x for most of its history, even during peak interest rates last seen in 2007.
PNC’s Rough Start To 2023
As mentioned earlier, PNC has underperformed big banks this year by a wide margin. Since it’s considered a regional bank, PNC was looped in with many other regionals when the crisis started. As you can see below, that has contributed to a significant decline
The reason I find this surprising is because, historically speaking, PNC has been relatively correlated to the big bank’s stock performance in terms of total returns. I looked at a few examples below:
PNC Total Return Correlation with JPM, GS, and MS
Before March 2023, PNC had a meaningful correlation with big banks. Since March, we’ve seen that correlation completely erased. If mean reversion holds true in this instance, we could see PNC return to following the performance of big bank stocks.
As mentioned earlier, PNC has very rarely traded at a P/E this low. Dating back to 1990, you can see below how often PNC’s P/E ratio has even dipped below 10x.
PNC’s P/E Ratio Is Near Historical Lows
Additionally, PNC has historically traded at similar a P/E multiple to the big banks. However, recently we have seen a deviation there as well.
PNC’s P/E Ratio Relative To Big Banks
Risks To Consider
I think PNC’s biggest risk is simple: human behavior. The idea that markets are always rational (see Efficient Market Hypothesis) is not necessarily true, and as investors it’s what drives opportunities to generate alpha. In theory and on paper, PNC’s balance sheet is well-positioned and has a profitable business model. However, there’s a chance a bank run could happen which would completely erase all logic around PNC’s well-capitalized and diverse balance sheet.
Conclusion
In my opinion, The PNC Financial Services Group, Inc. has been unfairly looped in with other regional banks that took on a ton more risk. I don’t think there is a real fundamental reason why PNC has sold off so much, especially after seeing Q1 2023 financials. The PNC Financial Services Group, Inc. is well capitalized, diversified, and managing its interest rate risk appropriately. If the banking crisis is indeed coming to an end, there may be a lot of upside for The PNC Financial Services Group, Inc. relative to the rest of the big banks, and even the broader S&P 500 index. Time will tell.
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