Interest fee

Lower fee income will affect PNC Financial’s (PNC) third-quarter earnings

PNC Financial Services Group, Inc. PNC is expected to report third quarter 2022 results before the October 14 opening bell. While the company’s earnings should have seen a year-over-year decline, its revenue has likely increased.

In the most recently reported quarter, the company’s earnings beat Zacks’ consensus estimate for net interest income (NII) growth. However, higher expenses and lower commission income affected results.

Notably, PNC Financial has an impressive history of earnings surprises. It has exceeded estimates in the past four quarters, generating an earnings surprise of 8.3% on average.

The PNC Financial Services Group, Inc Award and EPS Surprise

The PNC Financial Services Group, Inc price-eps-surprise | Quote from PNC Financial Services Group, Inc.

The company’s activities in the reportable quarter were not enough to win analysts’ confidence. As a result, Zacks’ consensus estimate for third-quarter earnings of $3.71 has fallen slightly over the past week, reflecting analysts’ bearish sentiments. The figure indicates a 1.1% drop from the number reported a year ago.

Still, the consensus revenue estimate is pegged at $5.4 billion, suggesting 3.8% year-over-year growth. Management expects revenue to be up 4-6% sequentially.

Let’s discuss the factors that may have impacted the company’s performance in the third quarter.

TIN: According to the latest Fed data, loan growth continued at a decent pace in the quarter ahead, with commercial and industrial loans, home loans and consumer loans moderating slightly in July and August compared to the second trimester. Encouragingly, commercial real estate loan growth accelerated in the third quarter. This likely supported PNC’s loan balances, which account for 68% of commercial loans. The company expects average loans to grow 1-2% sequentially.

The Zacks consensus estimate for average interest-earning assets of $499.8 billion for the quarter indicates a sequential increase of 2.3%. This should have contributed to the growth of the NII during the quarter.

In addition, the Federal Reserve continued to raise interest rates during the quarter to keep inflation under control. It raised interest rates by 150 basis points during the quarter, resulting in a policy rate of 3.0 to 3.25%, the highest level since 2008. This likely had a favorable impact on the bank’s return on assets, net interest margin (NIM) and NII. However, the inverted yield curve in the quarter ended September should have weighed on NIM to some extent.

Management expects NII to increase 10-12% sequentially. Additionally, the consensus estimate for the NII is set at $3.4 billion, suggesting an increase of 11.2% from the reported figure for the prior quarter.

Non-interest income: Heightened volatility, uncertainty, recession fears and geopolitical tensions weighed on equity market performance. Thus, income from asset management and brokerage commissions should have been negatively impacted.

Due to weak markets and global economic uncertainty, trading activity and IPOs declined in the third quarter of 2022. Given the disruptions in capital markets, the company’s income related to the capital markets capital was probably negatively affected.

Deposits slowed in the quarter, likely due to lower government handouts and consumer savings. Additionally, during the quarter, PNC removed insufficient funds fees from all consumer deposit accounts. These should have led to lower income from service fees on deposits.

Mortgage rates rose sequentially in the quarter ahead, with the 30-year fixed mortgage rate crossing the 6% mark in September. In addition, mortgage origination activity is estimated to have declined significantly, with rising rates affecting refinancing activity. Thus, the factors are expected to have hurt PNC Financial’s residential mortgage revenue in the quarter ahead.

Overall, the Zacks consensus estimate for non-interest revenue is pegged at $1.98 billion, suggesting a 3.7% sequential decline. Management expects commission revenue to fall 3-5% sequentially.

Expenses: Overall, technology investments and general inflationary pressures are likely to have inflated costs, while wage inflation is likely to have led to an escalation in staff costs. As a result, the increased cost base of these expenses likely hampered earnings growth. Management expects non-interest expense to be stable at 1% increase.

What Zacks’ model reveals

Our proven model does not predict an earnings beat for PNC Financial this time around. This is because he doesn’t have the right combination of the two key ingredients – a positive win ESP and Zacks rank #3 (Hold) or better – to increase the chances of a win beat.

You can discover the best stocks to buy or sell before they’re flagged with our earnings ESP filter.

ESP Earnings: The revenue ESP for PNC Financial is -1.92%.

Zacks Rank: The company currently carries a Zacks rank of 3.

Actions worth a look

United Bank BKU and M&T Bank MTB are a few stocks you might want to consider as they have the right combination of elements to post a pace of earnings in their next releases, according to our model.

The earnings ESP for BKU is +1.32% and the company currently holds rank 3 of Zacks. BKU is expected to release its third quarter 2022 results on October 20.

MTB is expected to release its third quarter results on October 19. MTB currently has a #3 Zacks rating and +0.34% ESP gain.

Stay on top of upcoming earnings announcements with Zacks Earnings Calendar.

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