Net interest margins should expand across the board as the U.S. regional banks recover from the historically low interest rates that have pressured profits for the past several years.
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No-moat-rated PNC Financial Services
' first-quarter results were largely in line with our expectations and do not alter our long-term thesis on the firm. We are raising our fair value estimate to $108 per share from $105, largely as a result of the time value of money.
Eric Compton is an equity analyst for Morningstar,
PNC's results were good, as expenses were down slightly for the quarter, helping the efficiency ratio stay within the 62%-63% range it has been in for the past four quarters. Higher interest rates caused floating-rate loans to reprice upward, helping net interest margins expand 8 basis points quarter over quarter. We were impressed by PNC's cost of deposits, which increased only 2 basis points during the same period. We believe it will probably take a few more rate hikes before pricing competition heats up and deposit betas begin approaching 1. In the meantime, we expect net interest margins to expand across the board as the U.S. regional banks recover from the historically low interest rates that have pressured profits for the past several years.
Even as some loans were repricing as a result of rates, PNC was able to expand its own loan book, including the commercial book, while maintaining its own credit spreads. This growth was particularly encouraging, given that the industry as a whole has seen more flat commercial loan growth this quarter, and vindicates PNC's expansion strategy in its newer markets, such as Minneapolis.
Credit quality remained pristine, near historical lows, and noninterest expenses were well controlled. Solid loan growth, expanding margins, and healthy credit metrics will all need to be in place for many of the regional banks to begin earning their current stock valuations, in our view. Meanwhile, the risks of tie-ups in Washington are increasing, and the value created by stock buybacks becomes more dubious under higher stock valuations. We remain positive on PNC's progress as a bank.
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