Job Cuts Are Probably Coming To This Bank

Chad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

PNC Financial Services (NYSE: PNC) seems destined to do some cutting of personnel. The bank acquired RBC Bank, and since the acquisition, the company's results have left something to be desired. In the bank's recent quarter it was more of the same. PNC is showing good growth when you add in the RBC acquisition, but until it has been a year or more, investors won't know whether this will add to organic growth. The one thing that seems relatively certain is that the bank will need to trim expenses to match their competition's growth, and to do this some tough decisions must be made.

Whether PNC shareholders like it or not, the bank is expected to underperform its peers. For instance, competition from the alphabet soup of BB&T (NYSE: BBT) and M&T Bank (NYSE: MTB), are both expected to grow earnings a good bit faster than PNC. In fact, according to analysts even the troubled Bank of America (NYSE: BAC) should see growth that is nearly twice that of PNC in the next few years. What is equally troubling is PNC stock sells for a forward P/E ratio that is higher than BB&T and is just slightly lower than M&T Bank. PNC's results would seem to indicate a bank that can grow faster than the 4% that analysts are calling for, but one step the bank must take is to bring its costs in line with its revenue growth.

In the last three months, PNC grew revenue by 15%, but EPS increased just 5.81%. One of the primary reasons the company's earnings didn't keep up with revenue was due to non-interest expense growth. In particular, personnel expenses grew by 23%. While it's true that PNC is still adjusting to its RBC acquisition, throwing more people at a problem isn't the way to grow a bank. It has to be frustrating seeing PNC display such lackluster earnings growth considering their outperformance in loan and deposit growth. Take a look at how well the bank did compared to its peers by these two measures:

<table> <tbody> <tr> <td> <p><strong>Name</strong></p> </td> <td> <p><strong>Loan Growth</strong></p> </td> <td> <p><strong>Deposit Growth</strong></p> </td> </tr> <tr> <td> <p>Bank of America</p> </td> <td> <p>Down 4.24%</p> </td> <td> <p>Down 2.11%</p> </td> </tr> <tr> <td> <p>BB&T</p> </td> <td> <p>Up 8.5%</p> </td> <td> <p>Up 11.9%</p> </td> </tr> <tr> <td> <p>M&T Bank</p> </td> <td> <p>Up 10%</p> </td> <td> <p>Up 8%</p> </td> </tr> <tr> <td> <p>PNC Financial</p> </td> <td> <p>Up 18%</p> </td> <td> <p>Up 10% </p> </td> </tr> </tbody> </table>

With the best loan growth and the second best deposit growth, you could easily make the argument that the bank was the number one bank in organic growth for the quarter. There is just one problem with that assumption; we don't know how much of this was from organic growth since PNC acquired RBC Bank. In fact, until more than a year has passed, the bank's refusal to break down the numbers into organic and non-organic growth has to be frustrating for investors. In fact, many of PNC's divisions showed impressive growth, but whether this is just from the addition of RBC or real growth, investors can't know for sure.

By far the largest segment of PNC belongs to their Corporate & Institutional Banking unit. In fact, Corporate Banking is over three times larger than the bank's next largest division. Corporate Banking delivered huge growth with loans up 32.05% and deposits up almost 16%. This division's strong growth led to huge earnings growth of 38.90%. The bank's Retail Banking division saw huge earnings growth as well, but much more subdued loan and deposit growth. Retail Banking saw loans up 10.82% and deposits up 7.27%. While earnings were up almost 59%, this was less from organic growth, and more from cost controls and lower provisions for loan losses. In fact, this was one of the few places in PNC's earnings report where the bank mentioned organic growth. Of the unit's 7.27% deposit growth, about 4% was organic account growth. Though PNC's Residential Mortgage Banking business is just under 4% of total revenues, the bank increased originations by 46.15% and earnings jumped 56.52%. In an almost perfect offset at about 4% of revenues, the bank's Non-Strategic Assets division however, showed earnings down 56.99%. As you can see, aside from a problem with Non-Strategic Assets, PNC's growth was impressive. The company's credit quality and net interest margin is in line with its peers, but there is always room for improvement.

Though many large banks have had to contend with credit issues, PNC is in the middle of the pack when it comes to non-performing loans. In the most recent quarter, PNC reported non-performers of 1.88% as a percentage of total loans. While this does not compare well to BB&T at 1.35% and M&T Bank at 1.44%, it is far better than Bank of America at 2.77%. When it comes to non-interest margin, on the other hand, PNC is performing very well. The bank reported its net interest margin at 3.82% in the quarter. Of the bank's peers, only BB&T was able to outperform PNC with a 3.94% net interest margin. By comparison, M&T's margin was 3.77%, and Bank of America once again fell far behind at 2.32%. What investors should keep in mind is PNC might improve its net interest margin as the bank allows higher interest rate deposits of RBC to run off and continues to grow its loan portfolio. However, the bank must also be careful to manage its loan growth well and cannot allow its non-performing assets percentage to climb much higher. If the bank grows loans at a high rate, but sees higher non-performers, PNC will be taking two steps forward and three steps back.

In the end, whether PNC will be a good investment has a lot to do with what you believe about the bank's growth potential. To be blunt, if PNC can't grow organically and analysts are right about the company reporting 4% EPS growth, then this stock is a waste of time. There are multiple better options, and specifically I would point to BB&T's expected 10% growth, and M&T's expected 7.7% growth. Since both banks sell for a similar P/E ratio to PNC, and both pay at least the same yield, these look much more attractive for investors. However, if PNC can maintain its higher loan and deposit growth, and also manage its costs better, the bank's growth could surprise to the upside. Fortunately for investors, the most obvious place the bank can eliminate expenses is with the 23% increase in personnel expenses. Unfortunately for the bank's employees, it's very likely job cuts are coming.







MHenage has no positions in the stocks mentioned above. The Motley Fool owns shares of Bank of America and PNC Financial Services. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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