The Great Unanswered Question at 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.

If investors could take every earnings report at face value, picking stocks would be a lot easier. However, there are unending ways for companies to define, compare, and revise their numbers to make them look better. The other day I saw an earnings report with words like, excluding, adjusted, and corrected, and they were all used in conjunction to adjust a number. While not as egregious as “excluding, corrected, and adjusted,” PNC Financial (NYSE: PNC) absolutely refuses to report organic growth.

Adjust This!

It’s frustrating as an investor when a company won’t just own up to what is going on. Some companies have recently explained a decline in their margins with the catch phrase “investment in price competitiveness.” What they really mean to say is, they couldn’t sell their stuff because competition was killing them, so they had to lower prices to compete.

I won’t stay on this soapbox, but the only thing more annoying than this is when a company won’t give comparisons without the benefit of a merger. If you take PNC’s earnings report at face value, the company appears to be doing well, but what about when the RBC acquisition benefits wear off?

Good Results…I Think

If we compare PNC’s results to some of their peers like BB&T (NYSE: BBT), M&T Bancorp (NYSE: MTB), or Capital One (NYSE: COF), the company looks like it’s doing pretty well. If the lifeblood of banking is deposits and loans, PNC is doing fine.

On the deposit side of the house, PNC reported average deposits up 9%, but included that this was due to the benefit of the RBC acquisition. The only peer to report better deposit growth was Capital One, which had its own large acquisition of some ING assets. Including ING, Capital One reported deposit growth of 24.25%. PNC’s peers that are growing more organically reported 4.7% deposit growth at BB&T, and 7% deposit growth from M&T.

When it comes to loans, PNC reported a 13% increase, but again the RBC acquisition was included. In similar fashion, Capital One reported a jump of 28.19% in loans, because of their acquisition of some HSBC assets. By comparison, BB&T grew loans by 5.3%, and M&T reported an 8% increase. What PNC and Capital One’s numbers would have been without these acquisitions, we may never know.

Analysts obviously like the chances for PNC to continue growing in the future. The bank has the second highest projected EPS growth rate in the next few years at 7.8%. The only peer bank that is expected to grow faster is BB&T at 8.33%, with M&T coming in at 7.6%, and Capital One rounding out the bunch at 7%.

Red Flags

Having worked in a bank for 10 years, one of the most talked about phrases is something being a “red flag.” Bankers like to look for warnings signs or “red flags” everywhere. In a business where risk management is key, this makes sense. That being said, I see two red flags in PNC’s last earnings report.

First, PNC reported deposit growth of 9%, but their transaction deposit growth rate was just 7%. While this is nothing to be ashamed about, BB&T and M&T reported 24% and 14% increases in non-interest checking account balances, which were both much higher than their total deposit growth. Capital One didn’t break down their deposit growth so we can’t compare. What this means is PNC grew total deposits by bringing in more expensive interest bearing deposits; BB&T and M&T reported slower growth overall, but less expensive non-interest bearing accounts were the driving force.

The second issue I noted was PNC’s level of non-performing loans isn’t dropping as fast as some of their peers. For instance, BB&T reported a better than 30% decrease in non-performing assets. PNC and M&T reported much slower declines in non-performers at 4% and 1.87% respectively. Since BB&T’s non-performing loan percentage leads the group at just 1.12%, this 30%+ decline is significant. M&T’s decline was slower than PNC, but their percentage is also lower at 1.6%. By comparison, PNC’s percentage of problem loans is 1.83%. A comparison of PNC and Capital One is a bit unfair, as Capital One’s portfolio is more credit card based. That being said, Capital One’s charge off rate was just 2.2%.

Wait for Clarity

I know that PNC’s stock is up more than 30% since the end of last year, but in this case, I would suggest investors wait for some clarity. Peter Lynch used to say, if the company is a great investment today, it’s going to be a great investment tomorrow, next week, next month, and next year. I don’t believe rushing to buy PNC stock is wise at this point.

Investors have no idea what the bank’s real growth rate is until the RBC acquisition benefits drop off. If PNC is being carried by the RBC deal, the stock could be in real trouble. It’s more than a little worrisome that PNC isn’t giving investors complete information about their organic growth without RBC. In a case like this, waiting for clarity seems to be the best course of action.

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Chad Henage owns shares of BB&T.; 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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