Exploring How 1 Bank Makes Its Money

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Source: Tax Credits.

Many investors shy away from investing in banks because they seem too complex or too difficult to understand, as they often have their hands in many different businesses. After a little research, however, you can learn very quickly what businesses a bank has, and how it returns money to shareholders.One bank worth exploring is PNC Financial Services (NYSE:PNC), which has seen quite a shift in the makeup of its business lines in recent years.

The assets
It’s always helpful to note where a bank devotes its resources, and the easiest way to determine that is by checking which businesses it devotes its assets to. At PNC, we can see that, in the most recent quarter, its assets by business could be broken down at follows:

Source: Company SEC Filings.

Unknown to many, PNC’s largest business (by assets) is its Corporate & Institutional Banking group, containing over $112 billion of PNC’s $302 billion in assets. In fact, the group’s total assets have grown by almost 45% since 2010, whereas PNC’s total assets have only grown by a little over 14%.

The BlackRock, Inc. (NYSE:BLK) section on the balance sheet is PNC’s 22% ownership stake in the world’s largest publicly traded investment firm. Blackrock has seen its stock rise 32% this year, and PNC actually has further unrealized gains there. During the last quarter, for example, it had accounted for the value of Blackrock to be $5.8 billion, while the market value of its investment was in fact $9.2 billion.

However, assets are only a small part of the overall story for investors, so it is important to see what PNC does with those assets to generate revenue.

The revenue

Source: Company SEC Filings.

Somewhat surprisingly, as shown by the chart above, the makeup of PNC’s revenue has remained relatively stable despite major changes in its assets. If we check how well PNC uses its assets to generate revenue, we see something very surprising:

Business-segment revenue / average assets

2010 Q2 2013
Retail Banking 8.6% 8.3%
Corporate & Institutional Banking 6.4% 5%
Asset Management Group 13.2% 13.9%
Residential Mortgage Banking 10.8% 8.8%
BlackRock 8.5% 10%
Non-Strategic Assets Portfolio 6.5% 6.8%
Other 1.1% 1.5%
PNC Total 5.7% 5.4%

Source: Company SEC Filings.

Not only does the Corporate & Institutional Banking business rank at the bottom in terms of revenue generated for every dollar of assets attributed to it, but it has in fact gotten worse as it has expanded. Should this concern investors?

The income
Of course not! It’s not revenue that investors are after, but income, and it is there we see why PNC has devoted so much attention and resources to its Corporate & Institutional Banking line of business.

Looking at the return on average assets for each business at PNC, we see why PNC invests so heavily in that specific business.

Return on average assets

Q2 2013
Retail Banking 0.8%
Corporate & Institutional Banking 2.2%
Asset Management Group 2%
Residential Mortgage Banking 0.8%
BlackRock 7.5%
Non-Strategic Assets Portfolio 2.3%
Other 0.6%
PNC Total 1.5%

Source: Company SEC Filings.

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