Excellent Results, 1 Change Would Make PNC Financial Services (PNC) Better

It’s hard to argue with revenue growth of 15% and EPS growth of more than 45%. However, I’m going to make the argument that PNC Financial Services (NYSE:PNC) is doing its investors a disservice. The company is making a choice right now that is hurting results and it just doesn’t make sense.

The Results Please
PNC competes with several large and growing institutions in each of its markets. Companies like BB&T Corporation(NYSE:BBT), M&T Bank Corporation (NYSE:MTB), and U.S. Bancorp (NYSE:USB) are on the doorstep of PNC’s branches. These are institutions with good organic growth and strong balance sheets. In short, PNC goes up against some of the strongest banks in the country every day they open their doors. With the strength of their competition, PNC has made some strategic acquisitions over the last few years. For the last several quarters, PNC has referenced its acquisition of branches from RBC Bank as key growth drivers in both deposits and loans.

While it’s hard for investors to gauge how PNC would be doing without this RBC acquisition, the bank doesn’t break down results with before and after results, so we have to take them for what they are worth. Based on PNC’s results, this RBC acquisition was worth every penny. The bank grew average deposits by 11%, which was the highest growth rate among their peers. By comparison, BB&T saw 8.1% growth; M&T grew deposits by 10%, and U.S. Bancorp saw an increase of 9.2%. The fact that all four banks saw significant increases in their deposit base just shows how competitive this part of the banking industry has become.

While deposit gathering was a close race, PNC basically left their competition in the dust when it came to loan originations. The bank saw an increase of 17% in loan balances on a year-over-year basis. Their competition just couldn’t keep up, with increases of 9.3%, 11%, and 8.6% at BB&T, M&T, and U.S. Bancorp respectively.

Another area of strength for PNC in the quarter was their net interest margin. The bank’s margin was 3.85% and only BB&T nearly matched this performance at 3.84%. M&T fell a bit off the pace at 3.74%, and U.S. Bancorp couldn’t keep up at 3.55%. Unfortunately for investors, PNC could have increased their net interest margin even further, and earnings would have been even stronger.

Hello? Pay Your Depositors!
In the banking industry, it’s a difficult balance of paying enough on your accounts to bring in deposits, and paying too much, which hurts your net interest margin. I know that PNC has been working through the RBC depositors and letting some of the interest bearing deposits walk away. However, PNC is letting too many interest bearing accounts out the door.