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Will PNC Financial Continue to Face Revenue Pressure?

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On Jun 15, 2016, we issued an updated research report on The PNC Financial Services Group, Inc. (PNC - Free Report) . Notably, shares of this Pennsylvania-based banking giant have lost more than 11.6% year to date.

PNC Financial’s revenues have been under pressure amid an overall challenging environment. Over the past several years, the company has experienced declining net interest margin (NIM) and muted growth in net interest income (NII) due to a persistent low interest rate scenario. The December rate hike was not enough to result in a significant boost. Notably, during the first quarter 2016, though NII grew 1% on a year over year basis, NIM declined 7%.

Further, despite having a diversified fee income base, the company failed to achieve a stable growth pattern in non-interest income over the past few years. Notably, non-interest income dropped 6% year over year during the first quarter 2016 mainly due to the  weaker equity markets and lower capital markets activity.

Significant improvement in top line growth is likely to remain elusive in the near term as management’s guidance calls for only a modest increase in revenues for the year.

Further, it should be noted that management’s forecast considered two rate hikes this year – one in June and the other in December. However, as the Federal Reserve kept its benchmark short-term interest rate unchanged on Wednesday at the end of the two-day policy meeting, banks like PNC Financial will continue to have a tough time ahead.

Among other issues, volatility in oil prices has affected the asset quality of the bank, given its exposure in the energy sector. High provisions to cover the soured loans of the energy companies continue to dent its financials. Notably, during the first quarter 2016, provision for credit losses was $152 million, significantly up from $54 million in the prior-year quarter, mainly tied with energy related loans.

While the company’s energy portfolio represents only 1.6% of its total outstanding loans and management views it to be ‘properly reserved’, continued pressure may pose risk to earnings growth.

Nevertheless, on the brighter side, PNC Financial is well positioned to drive operational efficiency through its cost effective measures. The company successfully realized its 2015 continuous improvement savings program goal of $500 million, and remains confident of achieving its full-year savings plan of $400 million for 2016 as well. As a result, expenses are likely to remain stable this year. Additionally, PNC Financial continues to benefit from increasing loan and deposit balances.

Over the past 60 days Zacks Consensus Estimate for 2016 declined 1.1% to $7.14 per share and for 2017 it declined 1.3% to $7.71.

PNC Financial currently carries a Zacks Rank #4 (Sell).

Stocks to Consider

Some top-ranked stocks in the finance space include LPL Financial Holdings Inc. (LPLA - Free Report) , Cathay General Bancorp (CATY - Free Report) and First Bancorp (FBP - Free Report) , each sporting a Zacks Rank #1 (Strong Buy).

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