PNC Financial reported mixed results for its second quarter, with earnings topping estimates, but revenue coming in lighter than expected. CFRA Research Senior Equity Research Analyst Alexander Yokum tells Yahoo Finance Live that despite the revenue miss, PNC's earnings were "quite strong" noting that PNC's credit quality improved and that its deposit runoff wasn't as bad as feared. When it comes to banks he is concerned about, Yokum highlights Zions Bancorp and Comerica "because they have high levels of non-interest bearing deposits, which have been shown to see higher outflows," though he notes those stocks could pop if they report positive news on deposits.
Video Transcript
- We have more on what PNC's performance means for its small and mid-sized peers. For analysis on that, we're joined by Alexander Yokum, Senior Equity Research Analyst at CFRA Research. Thanks so much for joining us-- joining us this morning. Let's get into PNC's results. How does it look to you especially when you compare it to the broader regional banking sector?
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ALEXANDER YOKUM: Yeah, thank you-- thank you for having me on. I think initially, there was a little bit concern with revenue coming in a little bit light. But once you look past that, I think, the results were actually quite strong.
You know, one of the bigger talks recently has been credit quality, and PNC's credit quality actually improved this quarter. So it's actually been two straight quarters of improving credit quality, which I thought was a really good sign considering, you know, they're trading at a pretty depressed multiple right now. So if the credit quality can stay strong, there definitely could be some outperformance there.
There was also a little bit of deposit runoff, which has been you know sort of a trend for regional banks in general, obviously following the collapse of Silicon Valley Bank. But it wasn't that significant, and PNC has excess deposits. And by allowing some of those deposits to run off, they actually kept their margins pretty strong. So their net interest margin only fell 5 basis points quarter over quarter.
And we think that bodes well for profitability going forward. Maybe-- maybe that won't be so strong at other regional banks that have a little bit less pricing power. But for PNC, we thought the results were actually pretty good.
JULIE HYMAN: I'm curious, Alex. It's Julie here. How flexible, how mobile, how mutable are deposits because we talked to an investor earlier who said, you know, people right now are going into things like money markets, other short-term instruments where they're getting a higher rate coming out of their bank accounts? Once that starts to change, though, do you expect those flows to come back?
ALEXANDER YOKUM: So, yeah, I guess the flows could come back if interest rates fall. But I think it's worth pointing out that, you know, the three banks that really struggled, if you think about First Republic, Signature Bank, and Silicon Valley Bank, they all had very high levels of uninsured deposits. And that basically translates to large account sizes. And if you have a large account size, higher interest rates, you know, you're more likely to want to search for yield.
But PNC, you know, their average consumer account size is about $11,000. So a 1% change in interest rates is not that significant in terms of the income you're earning. It's much more important about services. So we think banks that have high levels of insured deposits, so smaller account sizes face less of these pressures
- So, who are you concerned about in light of that, Alexander?
ALEXANDER YOKUM: Yeah, so I mean definitely the three banks that struggled. But I mean two-- I guess two banks that potentially have issues just because they also have high levels of non-interest bearing deposits which have been shown to see higher outflows Zion and Comerica have a little bit of potential pressures. But it is worth noting that they're, you know, generally, they have sold off pretty significantly. So if they had any deposit surprises on the upside, they could potentially see really strong results.
JULIE HYMAN: Yeah, I mean, I was going to ask sort of the flip side of that who you think is going to weather all of this the best.
ALEXANDER YOKUM: Yeah, so from the large regional banks, we actually do like PNC as our top-- as our top pick just because we really like them on the deposit side. And then there have been a lot of talks about increasing capital requirements. So you know the three super regionals-- PNC, US Bank, and Truist-- we think PNC is best positioned because Truist and Us Bank have some, you know, larger unrealized losses in their securities portfolio which could potentially dent their capital ratios if there's reforms there.
So yeah, PNC on the large banks, like I said very well diversified. Their CEO has a very strong track record of success, has outperformed over the last 10 years the peer group pretty significantly, and we think they're well positioned going forward given that well diversified banking model. And like I said, on a deposit perspective, we think they're well positioned to not necessarily face as much pressure than the rest of regional banks.
- That makes sense. I know, you know, in terms of their credit quality performance, as you mentioned, they did better. Their net loan charge offs were stable as they noted in their earnings report. Are there any risks on the horizon that would concern you when it comes to PNC?
ALEXANDER YOKUM: So the credit quality was better. I guess the risk there is office. So they do have some office exposure. We did see charge offs increase pretty significantly this quarter. They almost tripled, which sounds bad, but you know, it's coming off a low base and it's a small percentage of their portfolio.
So you know, in terms of that, you know, there's some concern just because you know, office it's tough to see that getting, you know, significantly better going forward. But since it's a small percentage of the portfolio, we think it's, you know, they're well positioned. I mean I think funding costs, like we said, we think PNC is better positioned than other regional banks. But the entire industry could underperform if these funding costs continue, if interest rates stay high, and if consumers continue to move their money because right now, if you're trying to gain deposits, it's very expensive.
So if you let some deposits run off, that's OK to keep costs low. But trying to actually add deposits is very expensive in this environment. So if this continues and you're trying to add loan growth, that could become very costly going forward, if this environment continues.
JULIE HYMAN: Yeah, and it's certainly not out of the question that it will continue at least for a little while here. You mentioned commercial real estate. And so, how should we be thinking about that exposure right now amongst the regional banks, especially since that issue has been so talked about?
ALEXANDER YOKUM: Yes, yeah, there was definitely I think a negative reaction last week to Wells Fargo. You know, they were pretty conservative on their commercial real estate, increased their allowances. So we think, you know, because regional banks have larger exposure to commercial real estate, there's definitely concern there.
But I think the positive is most of commercial real estate is actually OK right now. It really is office. And that is a small percentage of these bank's portfolio, typically 2%, 3%, 4%. So you know, relatively well positioned.
We also like that they've had a long time to prepare for this. You know one reason why, you know, the collapses in the spring were so sudden was because it was-- it was a factor that people weren't necessarily as concentrated on. You know, being unrealized securities losses, that wasn't necessarily something people were talking about.
And then like, uninsured deposits, you know, those were arguably considered positive because wealthy clients tend to be more profitable. So you know, that was a quick flip whereas you know, commercial real estate office, it's been known for a while now. So we actually think, you know, generally speaking, these executive teams have done a pretty good job building up reserves and preparing for a potential downturn.
JULIE HYMAN: Well, we're just at the beginning when it comes to the regionals. So it should be interesting. Alexander Yokum, thank you so much for giving us your perspective, Senior Equity Research Analyst at CFRA research. Appreciate it.