PNC Financial: Interest Rate Cuts Could Boost Lending (NYSE:PNC)

PNC Financial Services (NYSE:PNC) has some good things going for it. The company is well-positioned to benefit from the new cycle of lower interest rates, which may lead to increases in lending and refinancing. PNC is reasonable rated, which should allow the stock to rise with earnings growth.

PNC Financial Services Business Background

PNC Financial handles numerous services divided between its three business segments:

1. Retail banking: accounted for 62% of total net interest income in Q2 2024. This segment provides lending, deposits (checking/savings), insurance, investment management, brokerage and cash management services to retail customers and small businesses.

2. Corporate and institutional banking: constituted 35% of total net interest income. This segment focuses on medium and large customers for lending, capital markets management, treasury management, advisory products and related services.

3. The asset management group: made up the rest 3% of total net interest income and offers private banking services for high net worth clients. Services in this segment include: investment and retirement planning, credit/cash management, trust management, etc.

PNC Financial’s positive growth catalysts

The highly anticipated interest rate cycle is about to shift back to a rate cut phase. The Federal Reserve is expected to meet on September 17 and 18, where the Fed Funds rate is expected to be cut by at least 0.25%. The anticipated new rate cut cycle could increase loan demand to the benefit of PNC Financial. The benefit may not be significant in 2024 for PNC, but is more likely to boost PNC loan growth in 2025 if mortgage rates continue to decline. Lower rates could spur new mortgages for homebuyers who have been waiting for more attractive rates and increase refinancing for those with higher-rate mortgages. Lower rates can also encourage new business loans for expansion or start-ups.

PNC Financial expects the Fed to cut rates twice in 2024 — once in September and again in December, with a cut of 25 basis points each. This should set the company up for higher borrowing and refinancing demand in 2025. Of course, more rate cuts are likely to continue in 2025, depending on how inflation and employment data play out over the next few months.

PNC said in its Q2 2024 earnings conference call that the company added new customers as it sees strong business momentum across the franchise. Strong growth was particularly seen in new and emerging markets. As a result, PNC expects to achieve record net interest income in 2025.

In retail, PNC has launched a new rewards credit card where cardholders get 2% cashback on all purchases. The company plans to launch several new cards in the coming months and years. This could drive growth through increased interest and fee income.

PNC achieved a 1% increase in net interest income for Q2 2024. This was the first increase in net interest income in six quarters. The company expects this gain to be the start of a new uptrend.

Consensus estimates show that PNC Financial’s revenue is expected to decline slightly by -0.43%, while EPS is expected to decline by -8% in 2024. However, things look much better for 2025, with a expected 5.7% revenue growth and 13% EPS growth. I think there is a chance that PNC will outperform consensus expectations in 2024 as interest rates could be more attractive in Q4. Mortgage rates have started to fall as rate cuts by the Federal Reserve are anticipated. In my view, rate cuts should boost lending and refinancing growth in 2025. This makes the 2025 estimates look achievable.

ASSESSMENT

I use the PE ratio and the price-to-book ratio, which are standard valuation metrics for banks. The PE ratio provides a measure of the company’s earnings, while the price/book considers the bank’s balance sheet.

PNC Financial trades at 12x estimated EPS of $14.66 for 2025. PNC trades less than the Regional Banking industry’s PE of 14x, but higher than the industry’s forward PE of 10.5x. The company trades at a close and forward/book price of around 1.5 each. This is slightly higher than the industry price/book of 1.3.

Overall, PNC appears to be reasonably valued, which should allow the stock to grow roughly in line with earnings growth over the next year. So a gain of about 13% for the stock seems reasonable based on PNC’s expected EPS growth for 2025. A possible 13% price increase would take the stock to about $200 in about a year. This would bring the PE ratio to 13.6x based on the estimated 2025 EPS of $14.66, which would still be a reasonable valuation.

PNC technical perspective

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I zoomed in to the monthly chart to get a long-term perspective. Here we can see that the stock is in a multi-year uptrend. If PNC performs well over the next year, as lower interest rates could increase lending and refinancing, the stock would likely continue to move higher.

The purple RSI indicator (middle of the chart) is in the positive momentum zone (above the 50 level). The MACD indicator at the bottom of the chart is still in bullish mode as the blue MACD line remains above the red signal line. With the stock still in bullish technical territory, the price may continue higher as PNC benefits from increased lending and refinancing due to lower interest rates.

Risks to the investment thesis

It is important to note that the investment thesis may not work for PNC Financial. There is no guarantee that interest rates will fall enough to stimulate significant increases in lending and refinancing. Lower-than-expected growth in lending and refinancing over the next year could cause PNC to miss revenue and earnings estimates and could lead to underperformance of the stock.

Another risk is that lower interest rates could cause the bank to make less profit on the loan. PNC would also likely experience a loss in deposit returns as a result of lower interest rates. This could result in less retained earnings.

Banks tend to be more reluctant to raise new equity or reduce payouts during a falling interest rate cycle due to economic uncertainty. This could reduce PNC’s equity and loan supply. These risks could reduce PNC’s potential to grow net interest income.

PNC Financial’s Long-Term Outlook

The most likely scenario for PNC Financial, in my view, is that the new cycle of lower interest rates will spur further loan growth. However, it is not clear that the increase in new loans will outweigh any negatives from lower rates, such as lower earnings per loan or loss of profit on deposits. It may take several months for the effect of lower interest rates to increase loan demand.

PNC’s performance will most likely improve in 2025 as lending is expected to pick up. The PNC is more likely to benefit in 2025 compared to 2024, as the effect of lower interest rates is likely to last several months to stimulate higher loan demand. Of course, the possibility that lending will improve in late 2024 is still a possibility if rates become attractive enough for consumers and businesses.

PNC’s reasonable valuation should allow the stock to rise roughly in line with earnings growth. So the stock may experience strong double-digit growth over the next year driven by earnings growth.