Excellent Results, 1 Change Would Make Them Better

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

It's hard to argue with revenue growth of 15% and EPS growth of more than 45%. However, I'm going to make the argument that PNC Bancorp (NYSE: PNC) is doing its investors a disservice. The company is making a choice right now that is hurting results and it just doesn't make sense.

The Results Please
PNC competes with several large and growing institutions in each of its markets. Companies like BB&T (NYSE: BBT), M&T Bank (NYSE: MTB), and U.S. Bancorp (NYSE: USB) are on the doorstep of PNC's branches. These are institutions with good organic growth and strong balance sheets. In short, PNC goes up against some of the strongest banks in the country every day they open their doors. With the strength of their competition, PNC has made some strategic acquisitions over the last few years. For the last several quarters, PNC has referenced its acquisition of branches from RBC Bank as key growth drivers in both deposits and loans. 

While it's hard for investors to gauge how PNC would be doing without this RBC acquisition, the bank doesn't break down results with before and after results, so we have to take them for what they are worth. Based on PNC's results, this RBC acquisition was worth every penny. The bank grew average deposits by 11%, which was the highest growth rate among their peers. By comparison, BB&T saw 8.1% growth; M&T grew deposits by 10%, and U.S. Bancorp saw an increase of 9.2%. The fact that all four banks saw significant increases in their deposit base just shows how competitive this part of the banking industry has become.

While deposit gathering was a close race, PNC basically left their competition in the dust when it came to loan originations. The bank saw an increase of 17% in loan balances on a year-over-year basis. Their competition just couldn't keep up, with increases of 9.3%, 11%, and 8.6% at BB&T, M&T, and U.S. Bancorp respectively.

Another area of strength for PNC in the quarter was their net interest margin. The bank's margin was 3.85% and only BB&T nearly matched this performance at 3.84%. M&T fell a bit off the pace at 3.74%, and U.S. Bancorp couldn't keep up at 3.55%. Unfortunately for investors, PNC could have increased their net interest margin even further, and earnings would have been even stronger.

Hello? Pay Your Depositors!
In the banking industry, it's a difficult balance of paying enough on your accounts to bring in deposits, and paying too much, which hurts your net interest margin. I know that PNC has been working through the RBC depositors and letting some of the interest bearing deposits walk away. However, PNC is letting too many interest bearing accounts out the door. 

Every bank has to fund their loans through either depositors or borrowed funds. The mistake PNC made can be summed up fairly easily. The bank allowed “Other deposits” to drop 10%, while borrowed funds increased 13%. Hello? If the bank made the choice to pay up a little bit for some money market or CD clients, they wouldn't have needed to borrow as much, if at all.

What's The Difference?
The difference this might make to PNC going forward is huge. Right now PNC is expected to grow earnings at the lowest rate of their peers. Analysts are calling for just over 6% EPS growth in the next few years. By comparison, M&T is expected to grow by 8.1%, U.S. Bancorp is expected to grow by 9.1%, and BB&T tops this group with a 10.87% expected growth rate. If PNC were able to grow its interest bearing deposits enough to decrease or eliminate the need to borrow, their earnings growth would increase. 

With PNC shares selling for the lowest P/E ratio of the group at about 9.6 times projections for 2013, any increase in the company's earnings growth would theoretically increase the value of the shares. BB&T and U.S. Bancorp both sell for over 10 times projected earnings, and M&T sells for over 12 times projections. Since investors can get a yield between 2.4% and 3% with any of these companies, their growth rates are what will separate them for investors. PNC's current quarter results were good, but in this hyper competitive environment, the bank can't miss a trick. Increasing “Other deposits” to save from borrowing money is the right move, and would probably make PNC more popular in their communities as well. Unless management realizes what they are missing, other banks offer a better value at the current time.

MHenage has no position in any stocks mentioned. The Motley Fool owns shares of 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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