PNC Financial Services (NYSE: PNC) is far from being a household name, but many analysts are touting its stock as a must buy. What do they know that you don't? And are PNC shares really worth adding to your portfolio?
Eighth Biggest US Bank
Pittsburgh-based PNC Financial is one of the country's most popular regional banks with some $300.8 billion in assets and $211.6 billion in deposits. This puts it eighth among the largest banks in the US for the first quarter of 2013, according to business intelligence company SNL Financial. In addition, the bank has an extensive network of over 2,800 branches across nineteen states as well as the District of Columbia.
PNC offers diversified financial services to its customers through its business segments that include:
1- Retail Banking like deposit, brokerage and money management services.
2- Corporate and Institutional Banking that provides credit services to middle market companies.
3- Residential Mortgage Banking that offers customers a diversified range of home loan options
4- Its Non-Strategic Assets Portfolio that offers commercial leases and loans in addition to consumer residential mortgage loans
5- And its Asset Management Group that offers wealth management services and products such as retirement and investment planning.
In addition, PNC also has a 25% ownership stake in BlackRock (NYSE: BLK), one of the country's biggest publicly-traded investment management companies, that offers a variety of investment products to individual and institutional investors worldwide. Of these segments, the Retail, Corporate, and Institutional Banking segments make the highest contribution to the company's financial revenue, jointly accounting for around 80% of the total revenue.
For the first quarter of the year, the bank reported a strong net income of $1 billion, some 23% higher than the $811 million reported in the same quarter last year. This brought diluted earnings per common share to $1.76 compared with the $1.44 reported in the first quarter of 2012. Total revenues reached close to $4 billion for the quarter compared with the $3.7 billion reported in the same period last year. Net interest income accounted for 61% of consolidated revenues with non-interest income making up 39 percent.
All of the bank's business segments reported net earnings for the quarter, with the Corporate and Institutional segment recording the highest income at $541 million, up 9% from the $495 million reported in the same quarter last year, followed by Retail Banking with $120 million and the Non-Strategic Assets Portfolio with $79 million. In addition, PNC's BlackRock holdings also performed strongly, as recorded in the "Other, Including BlackRock" category, with $176 million in earnings. This category also includes results from residual activities that do not qualify to be reported as a separate business. PNC owns some 22% of BlackRock, which is presently worth some $7.4 billion and generates a steady stream of passive income for the bank.
As a result of its strong earnings performance, the bank's share prices have steadily been appreciating. Its current closing price of $71.75 (as of June 11) is 21% higher than the closing level of $59.54 recorded at the start of the year (Jan. 2) and 23% higher than the $58.17 reported on June 11, 2012.
PNC also increased its dividend payouts to $0.44 per share, a 44% hike from the $0.40 per share paid out in April 2012. Previously, PNC had also hiked dividends by 14% from the $0.35 per share it had paid out in 2011. The bank has also undertaken a share buyback program as part of its commitment to return value to its shareholders, and re-bought some $190 million in common shares in addition to the $820 million it paid out in common stock dividends.
The Bottom Line
Analysts find PNC Financial attractive due to a number of factors, such as the bank's diverse revenue sources that include contributions from not only banking activities but also asset management and investment services. In addition, the bank has strengthened its banking activities with a series of strategic acquisitions over the past couple of years. In March 2012, for instance, the bank acquired RBC Bank (USA), the American retail banking subsidiary of the Royal Bank of Canada, which gave PNC's retail banking business an additional 400 branches in the Southeast, as well as $12 billion worth of deposits, 460,000 checking accounts and $4.9 billion in loans.
The bank has also been undertaking a series of cost-cutting moves in order to strengthen its profitability by reducing more expensive offline live banking services, which cost some $4 a transaction, in favor of cheaper ATM and online banking, which cost just $0.85. In March, PNC announced that it would close down some 200 branches in 2013 as part of its ongoing efforts to cut down on costs by $700 million for the year. PNC had already closed down some 65 branches in the previous year. The bank has also announced it would eliminate its free checking program, requiring all customers to meet minimum average balance or monthly direct deposit requirements or pay a monthly fee.
The only concerns investors should have about PNC share prices are from external factors that could impact the bank's profit margins, such as the low interest rate environment. The difference between interest rates on loans and interest paid by banks on deposits has fallen to 3.4 percentage points as of late 2012, from 4 points in 2002 following the economic downturn in 2001, and 5 points in 1994 in the wake of the recession of the early 1990s.