Our forecast calls for a Fed rate increase in December, which should improve contributions from the lending business of this featured regional bank stock, explains Stephen Biggar of Argus Research.
We view PNC Financial Services Group (PNC) as well positioned to benefit from rising interest rates.
Its balance sheet, like those of most regional banks, is asset-sensitive, so lending revenues are expected to benefit from a higher rate environment as assets re-price faster than liabilities.
We are raising our rating on PNC Financial Services Group to BUY from HOLD following the company’s 3Q16 earnings report.
While revenue growth remains elusive in the lending business, PNC is making progress on a range of strategic initiatives, including expansion in the Southeast and in the Chicago area, where increased brand awareness has led to good growth in both retail and commercial banking.
In addition, the company is benefiting from strong capital levels and a high loan-to-deposit ratio, and from its large 21% stake in BlackRock (BLK), which provides healthy recurring dividends.
Given generally sluggish growth in lending revenues, the company is taking steps to boost non-interest income.
It derives the largest portion of its revenue from asset management, which should benefit from its expansion in the Southeast and in the Chicago area, where brand recognition is increasing.
Retail banking, where PNC focuses on the “mass affluent” segment, is also expected to be a driver. In the near term, however, asset management faces challenges related to market volatility.
We are raising our 2016 EPS estimate to $7.24 from $7.20, mostly on the better-than-expected 3Q results. We are also raising our 2017 forecast to $7.61 from $7.54 based on our expectations for slightly stronger margins as interest rates rise.
PNC trades at 11.6-times our 2017 EPS estimate, below the average of 12.4 for regional bank peers. Reflecting the 21% stake in BlackRock, which provides substantial dividends, we believe that the shares should trade at a premium to peers.
Our new target price of $98 implies a multiple of 12.9-times our 2017 EPS estimate and a total potential return, including the dividend, of 14% from current levels.
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By Stephen Biggar of Argus Research
