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

Every bank has to fund their loans through either depositors or borrowed funds. The mistake PNC made can be summed up fairly easily. The bank allowed “Other deposits” to drop 10%, while borrowed funds increased 13%. Hello? If the bank made the choice to pay up a little bit for some money market or CD clients, they wouldn’t have needed to borrow as much, if at all.

What’s The Difference?
The difference this might make to PNC going forward is huge. Right now PNC is expected to grow earnings at the lowest rate of their peers. Analysts are calling for just over 6% EPS growth in the next few years. By comparison, M&T is expected to grow by 8.1%, U.S. Bancorp is expected to grow by 9.1%, and BB&T tops this group with a 10.87% expected growth rate. If PNC were able to grow its interest bearing deposits enough to decrease or eliminate the need to borrow, their earnings growth would increase.

With PNC shares selling for the lowest P/E ratio of the group at about 9.6 times projections for 2013, any increase in the company’s earnings growth would theoretically increase the value of the shares. BB&T and U.S. Bancorp both sell for over 10 times projected earnings, and M&T sells for over 12 times projections. Since investors can get a yield between 2.4% and 3% with any of these companies, their growth rates are what will separate them for investors. PNC’s current quarter results were good, but in this hyper competitive environment, the bank can’t miss a trick. Increasing “Other deposits” to save from borrowing money is the right move, and would probably make PNC more popular in their communities as well. Unless management realizes what they are missing, other banks offer a better value at the current time.

The article Excellent Results, 1 Change Would Make Them Better originally appeared on Fool.com and is written by Chad Henage.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.