The PNC Financial Services Group, Inc.

Transcription

1 February 16, 2015 The PNC Financial Services Group, Inc. (PNC-NYSE) Current Recommendation Prior Recommendation Outperform Date of Last Change 05/04/2010 Current Price (02/13/15) $92.38 Target Price $97.00 NEUTRAL SUMMARY PNC Financial s fourth-quarter 2014 earnings outpaced the Zacks Consensus Estimate and came ahead the prior year quarter figure as well. Results were aided by lower provision for credit losses and higher non-interest income. Expanding cost base and reduced net interest income were headwinds. We believe that PNC Financial is well positioned to grow, given its diverse revenue mix, balance sheet strengthening efforts, strategic acquisitions and solid capital levels. However, a tepid economic recovery, a persistent low interest rate environment and increased regulatory headwinds remain concerns. SUMMARY DATA 52-Week High $ Week Low $78.00 One-Year Return (%) Beta 1.06 Average Daily Volume (sh) 2,744,243 Shares Outstanding (mil) 526 Market Capitalization ($mil) $48,592 Short Interest Ratio (days) 2.20 Institutional Ownership (%) 80 Insider Ownership (%) 1 Annual Cash Dividend $1.92 Dividend Yield (%) Yr. Historical Growth Rates Sales (%) -0.9 Earnings Per Share (%) 13.2 Dividend (%) 43.6 using TTM EPS 12.7 using 2015 Estimate 12.8 using 2016 Estimate 11.7 Zacks Rank *: Short Term 1 3 months outlook 3 - Hold * Definition / Disclosure on last page Risk Level * Below Avg., Type of Stock Large-Value Industry Banks-Major Reg Zacks Industry Rank * 183 out of 267 ZACKS CONSENSUS ESTIMATES Revenue Estimates (In millions of $) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) ,955 A 4,064 A 3,920 A 4,073 A 16,012 A ,777 A 3,810 A 3,841 A 3,947 A 15,375 A ,744 E 3,821 E 3,885 E 3,951 E 15,401 E ,389 E Earnings Per Share Estimates (EPS is operating earnings before non-recurring items, but including employee stock options expenses) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) 2013 $1.74 A $1.98 A $1.77 A $1.87 A $7.36 A 2014 $1.82 A $1.85 A $1.79 A $1.84 A $7.30 A 2015 $1.69 E $1.80 E $1.83 E $1.90 E $7.22 E 2016 $7.88 E Projected EPS Growth - Next 5 Years % Zacks Investment Research, All Rights reserved S. Riverside Plaza, Chicago IL 60606

2 OVERVIEW Headquartered in Pittsburgh and incepted in 1983, PNC Financial Services Group Inc. (PNC) is one of the nation s major financial services organizations providing consumer and business banking. The company is engaged in retail banking, corporate and institutional banking, asset management and residential mortgage banking. PNC Financial s primary geographic markets are Delaware, Florida, Illinois, Indiana, Kentucky, Maryland, Michigan, Alabama, Missouri, New Jersey, Ohio, Pennsylvania, North Carolina, Virginia, Georgia, Washington, D.C., South Carolina and Wisconsin. The group s principal subsidiary is PNC Bank, based in Pittsburgh, PA. PNC Financial reports through 6 business segments: Retail Banking, Corporate and Institutional Banking, Asset Management Group, Residential Mortgage Banking, Distressed Assets Portfolio, and Other, including BlackRock. Retail Banking (accounted for 39% of total revenue in 2014) This segment provides deposit, lending, brokerage, investment management, and cash management services to consumer and small business customers within its primary geographic markets. Customers are serviced through its branch network, call centers and online banking. Corporate and Institutional Banking (36%) This segment provides lending, treasury management, and capital markets-related products and services to mid-sized corporations, government entities and selectively to large corporations. Asset Management Group (7%) This segment provides a wide range of tailored investments, trust, private banking and full-service brokerage to affluent individuals and families, including the ultra-affluent. Institutional Investments serves as an investment manager and trustee for companies, non-profit organizations and retirement plans across the country. Residential Mortgage Banking (5%) This segment directly originates first lien residential mortgage loans on a nationwide basis with a significant presence within the retail banking footprint, and also originates loans through majority owned affiliates. Non-Strategic Assets Portfolio (4%) This business segment includes commercial residential development loans, cross-border leases, consumer brokered home equity loans, retail mortgages, non-prime mortgages, and residential construction loans. The company obtained the majority of these non-strategic assets through acquisitions of other companies and they fall outside the company s core business strategy. Other, including BlackRock (9%) The Other, including BlackRock category includes earnings and gains or losses related to PNC Financial s equity interest in BlackRock, and residual activities that do not meet the criteria for disclosure as a separate reportable business such as gains or losses related to BlackRock transactions, integration costs, asset and liability management activities including net securities gains or losses, other-than-temporary impairment of investment securities and certain trading activities, exited businesses, equity management activities, alternative investments, inter-company eliminations, most corporate overhead, tax adjustments that are not allocated to business segments, and differences between business segment performance reporting and financial statement reporting under generally accepted accounting principles. Notably, BlackRock is the largest publicly traded investment management firm in the world. As of Dec 31, 2014, the company s economic interest in BlackRock was 22%. Equity Research PNC Page 2

3 Full Year 2014 Reve nue (Business Segm ents) Non-Strategic Assets Portfolio 4% Other, including BlackRock 9% Retail Banking 39% Residential Mortgage Banking 5% Asset Management Group 7% Corporate & Institutional Banking 36% As of Dec 31, 2014, PNC Financial had total consolidated assets of $345.1 billion, loans of $204.8 billion, deposits of about $232.2 billion and shareholders equity of about $44.6 billion. REASONS TO BUY With one of the most attractive business mixes in the banking industry, PNC Financial is making strong progress on improving its core profitability, emerging out of the recent financial crisis. We expect the company to perform better than its peer group due to its limited dependence on and exposure to the credit environment, as more than half of its revenues is derived from fee businesses. Since the economic downturn began in the middle of 2007, the company has been profitable in every quarter, except the fourth quarter of 2008, when the conforming provision was utilized for the National City acquisition. PNC Financial is driving operational efficiency through its cost containment efforts. For first quarter 2015, management anticipates non-interest expenses to be down in the high single-digits, while 2015 expenses are anticipated to remain stable with the 2014 level considering its planned investments in businesses. The company has been able to achieve its full-year 2014 continuous improvement savings (CIP) target of $500 million. Notably, 2014 marked the second consecutive year of reducing total costs while making investments in business. Further, management expects to continue the CIP in 2015 as well and targets an additional $400 million in cost savings from CIP. Such efforts are encouraging and we believe that the company s consistent focus on core expense management will help generate positive operating leverage in case of slow revenue growth. PNC Financial stands solid from the balance sheet perspective. Going forward, we expect the company to experience an increase in loans both from its legacy business as well as the RBC acquisition. Notably, during 2014, loans and deposits increased 5% year over year, reflecting organic growth of the company. According to management, loans are expected to rise modestly in first quarter We believe that the 2014 stress test clearance was a testimony to PNC Financial s solid capital position. With its proven cash generating capacities, the company remains committed to increasing shareholders wealth through dividend increases and share buybacks. PNC Financial has continuously paid dividends despite the lackluster economic environment during the financial crisis. Moreover, it has announced dividend increases consecutively over the past 5 years. The Equity Research PNC Page 3

4 REASONS TO SELL latest hike of 9% was announced in Apr We believe such a shareholder-friendly approach will boost investors confidence in the stock. PNC Financial was already one of the leading bank wealth managers in the country and the acquisition of National City in Dec 2008 created significant growth potential in new high-net-worth and institutional markets. Continuing with its acquisition spree globally, in 2011, the company completed the acquisition of the 27-branch retail bank franchise in Georgia from Flagstar Bank and 19 branches from a subsidiary of BankAtlantic Bancorp Inc. Further, in 2012, the company completed the purchase of RBC Bank (USA) and expanded its footprint in the Southeast markets. Notably, this represents the company's 7 th successful acquisition over the last nine years. We believe that such opportunistic acquisitions will help in generating revenue growth going forward. RECENT NEWS Since 2009, PNC Financial s growth in net interest income (NII) and net interest margin (NIM) exhibited volatile movement. This reflects that the company is unable to maintain steady and sustainable growth in its NII and NIM amid a low interest rate environment. Notably, NIM was down from 3.94% in 2012 to 3.57% in 2013 and further fell to 3.08% in NII fell 5% year over in 2013 and further declined 7% in Though interest rates have started increasing, looking ahead management expects stable net interest income and continued decline in purchase accounting accretion. We believe that in the absence of a significant rise in interest rates, margins will remain under pressure in the coming quarters. PNC Financial is embroiled in several legal hassles including mortgage repurchase litigation and lender placed insurance litigation. We believe an escalation in legal costs will affect the company s profitability going forward. The macroeconomic environment is undergoing a slow recovery, with uncertain prospects. This is compounded by changes within the financial services industry and regulatory actions. The Dodd- Frank Act is expected to adversely affect revenues and increase both direct and indirect costs of business for PNC Financial. Moreover, we believe that the company s flexibility with regard to business investments would be somewhat limited in the medium term, given the stricter regulatory requirements that the company must adhere to with respect to capital. PNC Financial Posts Solid Q4: Earnings, Revenue Beat Jan 16, 2015 PNC Financial Services reported another impressive quarter with an earnings surprise of 5.7%. The company s fourth-quarter 2014 earnings per share of $1.84 outpaced the Zacks Consensus Estimate of $1.74. Moreover, the bottom line compared favorably with $1.87 earned in the prior-year quarter. For full year 2014, the company reported earnings per share of $7.30, which surpassed the Zacks Consensus Estimate of $7.20. However, this compared unfavorably with $7.36 earned in the prior year. Better-than-expected results were primarily driven by a fall in the provision for credit losses and rise in non-interest income, which were, however, partially offset by higher expenses and lower net interest income. Further, an enhanced credit quality acted as a positive during the quarter. The company reported net income of $1.06 billion in the reported quarter, down 1.6% from the year-ago quarter. Equity Research PNC Page 4

5 Furthermore, segment-wise, on a year-over-year basis, quarterly net income in Retail Banking, Asset Management Group and Other, including BlackRock segments, rose 60.7%, 25% and 10.6%, respectively. On the other hand, Corporate & Institutional Banking and Non-Strategic Assets Portfolio segments declined 0.9% and 35.7%, respectively. Residential Mortgage Banking segment s net income fell substantially from $55 million in fourth-quarter 2013 to a negative $9 million in fourth-quarter Performance in Detail Total revenue for the quarter came in at $3.95 billion, down 3.1% year over year. The fall was due to lower net interest income, partially offset by higher non-interest income. However, total revenue was above the Zacks Consensus Estimate of $3.81 billion. Total revenue for the year came in at $15.4 billion, beating the Zacks Consensus Estimate of $15.2 billion, but lower than the 2013 tally of $16.0 billion. NII was $2.1 billion, down 7.5% year over year. The fall was mainly due to lower core net interest income and reduced scheduled accretion net of contractual interest. Moreover, net interest margin decreased 49 bps year over year to 2.89%. Non-interest income climbed 2.4% year over year to $1.9 billion. The uptick was mainly due to increased asset management revenue, along with higher corporate service fees, higher service charges on deposits and other, including net securities gains. PNC Financial s non-interest expense stood at $2.5 billion, up 1% from the prior-year quarter. The rise was mainly due to higher charges related to occupancy, equipment marketing and other, partially offset by lower costs related to personnel. Credit Quality PNC Financial s overall credit quality improved in the said quarter. Nonperforming assets fell 16.7% year over year to $2.9 billion. Ratio of nonperforming assets to total assets was 0.83% as of Dec 31, 2014, down 25 bps from the year-ago quarter. Moreover, the allowance for loan and lease losses to total loans was 1.63% as of Dec 31, 2014, decreasing 21 bps from the prior-year quarter. Net charge-offs fell 37.6% year over year to $118 million. Additionally, provision for credit losses was $52 million, down 54% year over year. Capital Position As of Dec 31, 2014, the transitional Basel III common equity Tier 1 capital ratio was 11.0%, down 1 basis point sequentially. Further, Tier 1 risk-based capital ratio was 12.7%, while leverage ratio was 10.8%. As of Dec 31, 2014, total assets were $345.1 billion, up 7.8% from the prior-year quarter. Total loans were $204.8 billion, up 4.7% year over year. Further, total deposits increased 5.7% from the prior-year quarter to $229.4 billion. Capital Deployment Update In fourth-quarter 2014, PNC Financial repurchased 6.1 million common shares for $0.5 billion. Notably, the share buyback came under the company s previously announced $1.5 billion share repurchase program for the four-quarter period beginning second-quarter 2014, under its existing common stock repurchase authorization. The company repurchased 12.9 million common shares in 2014 for $1.1 billion. Equity Research PNC Page 5

6 On, Jan 2, 2015, PNC Financial declared a quarterly cash dividend of $0.48 per share on the common stock. The dividend was paid on Feb 5 to shareholders of record at the close of business as of Jan 15. VALUATION PNC Financial shares on a price-to-earnings () basis, currently trade at 12.8x the Zacks Consensus Estimate for 2015, which is at 5.2% discount to the industry average of 13.5x. On a price-to-book (P/B) basis, the shares trade at 1.0x, a 16.7% discount to the industry average of 1.2x. The valuation on both and P/B basis looks attractive. Further, PNC Financial has a trailing 12-month ROE of 9.9%, compared with the industry average of 9.6%. This implies that the company reinvests its earnings more efficiently than its industry peers. Our 6-month target price of $97.00 equates to 13.4x the Zacks Consensus Estimate for Combined with a quarterly dividend of $0.48 per share, this target price implies an expected return of about 6.0% over that period. This is consistent with our long-term Neutral recommendation on the shares. PNC Financial currently carries a Zacks Rank #3 (Hold). Key Indicators F1 F2 Est. 5-Yr EPS Gr% P/CF 5-Yr High 5-Yr Low The PNC Financial Services Group, Inc. (PNC) Industry Average S&P U.S. Bancorp (USB) Wells Fargo & Company (WFC) The Bank of New York Mellon Corporation (BK) State Street Corporation (STT) TTM is trailing 12 months; F1 is 2015 and F2 is 2016, CF is operating cash flow P/B Last Qtr. P/B 5-Yr High P/B 5-Yr Low ROE D/E Last Qtr. Div Yield Last Qtr. EV/EBITDA The PNC Financial Services Group, Inc. (PNC) Industry Average NA S&P NA 2.1 NA Equity Research PNC Page 6

7 Earnings Surprise and Estimate Revision History Equity Research PNC Page 7

8 DISCLOSURES & DEFINITIONS The analysts contributing to this report do not hold any shares of PNC. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will under perform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 1121 companies covered: Outperform %, Neutral %, Underperform 7.2%. Data is as of midnight on the business day immediately prior to this publication. Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. In determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on each stock s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5 th group has the highest values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to the second, third, and fourth groups of stocks, respectively. Coverage Team QCA Lead Analyst Analyst Copy Editor Content Ed. 11B Kalyan Nandy Priti Dhanuka Anindita Chaudhury Ishani Mukherjee Priti Dhanuka Equity Research PNC Page 8