PNC Commands Premium Valuations on Rates, BlackRock
Asset management, rates
PNC Financial Services (PNC) manages both diversified banking operations and financial services divisions. The company generates almost 45% of its total revenue via non-interest income, which garners the highest portion of its income from asset management services due to its holdings in BlackRock (BLK).
In 4Q16, as broader equities improve, PNC is expected to do better in asset management services and corporate services. The company could also see higher interest income in 2017 due to the Federal Reserve’s recent rate hike.
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Holdings in BlackRock, the world’s biggest asset manager, have led to better margins for PNC over the past few years. In 3Q16, PNC reported a net income of $1 billion, or $1.84 per diluted common share, reflecting higher fee income, higher non-interest expenses, and a lower provision for credit losses. To compare, its net income stood at $1.1 billion, or $1.90 per diluted share, in 3Q15.
PNC Financial continues to attract premium valuations among its peers JPMorgan Chase (JPM), Bank of America (BAC), and other major banks that form part of the Financial Select Sector SPDR ETF (XLF). The stock has risen 35% over the past year, reflecting improved performance and prospects. Currently, PNC Financial is valued at 15.5x on a one-year forward earnings basis, compared to the peer average of 13.9x. This premium can be attributed to the following factors:
- diversified earnings through its non-interest component
- garnering new flows and holdings in BlackRock (BLK)
- distribution of capital through repurchases and dividends
PNC’s diversified earnings and expected rise in interest income could lead to better margins and growth. The company is strong on the expense management front, and it’s focusing on improving its services. It’s expecting a 10%–14% rise in fee income in the next few quarters, boosted by better results from its BlackRock investments.
Going forward, the US economic outlook is expected to drive growth in the commercial lending and asset management spaces.