PNC Financial Services

PNC Financial reported strong second-quarter results, with adjusted earnings per share growing 26% year over year, excluding noncore items. The bank also raised its loan growth, net interest income growth, fee income growth, and expense guidance for 2026.

Why it matters: We previously expected elevated deposit competition in the US banking industry, but PNC's performance stood out in the quarter. The bank grew its non-interest-bearing deposit mix by 1.0% sequentially, much better than peers' range of a 1.3% decline to a 0.3% increase. The bank grew non-interest-bearing deposit balances across both retail and commercial clients, which we attribute to its successful expansion in newer markets and the strength of its deposit franchise. PNC remains confident of achieving a 3% net interest margin in the second half of 2026, implying around 4 basis points of upside from the second quarter, though it expects interest-bearing deposit costs to drift back to first-quarter levels after a 5-basis-point sequential improvement in the second quarter.

The bottom line: As we incorporate the latest results and updated guidance, we plan to raise our $241 fair value estimate for narrow-moat-rated PNC Financial by a mid-single-digit percentage. Most of the increase comes from higher near-term fee income and net interest income growth, partially offset by higher expenses in 2026. We view PNC’s shares as fairly valued after our valuation updates. We think the bank has done a good job integrating BBVA USA, and we continue to expect it to execute well with the FirstBank acquisition. PNC successfully converted FirstBank customers to its platform in June. We still do not plan to include any revenue synergies from the FirstBank acquisition. Our more optimistic view on PNC's fee income growth is mostly driven by strong performance in capital markets fees and asset management fees in the first half of the year.

Capital market fees were the brightest spot in PNC's fee income performance, up 80% from the prior-year quarter. Unlike major Wall Street investment banks, PNC has little direct exposure to the current supercycle of mega-IPOs. Its Harris Williams business instead benefited from the recovery in middle-market merger and acquisition activity, which represented around 40% of PNC's capital markets fees. Management expects a sequential step down in the third quarter from Harris Williams' all-time-high fees, but 2026 guidance calls for capital markets fees growth of 25%-30% year over year, much better than our prior forecast of 10%.

We are increasing our fair value estimate for PNC Financial to $253 per share from $251 per share. The increase is mostly driven by the time value of money since our last update. We also updated our interest rate forecast. Our base case scenario now includes a 0.25% increase in the federal-funds rate in December 2026 as well as the 0.25% hike in September 2026, and we expect the Federal Reserve to start cutting short-term interest rates in the second half of 2027. More importantly, our long-term rate assumptions remain unchanged. We note PNC is not as rate sensitive as some of the smaller regional banks under our coverage. We expect the bank to grow its net interest income at a CAGR of 5.8% from 2025-30, up by 0.1% from our prior model. Our $253 fair value estimate is equivalent to 2.3 times tangible book value at the end of the second quarter of 2026, or 2.1 times when excluding the effects of AOCI.

Consistent with other banks, growth in net interest income is one of PNC’s key drivers. We project 15.7% growth in net interest income, or NII, for 2026, driven by the inclusion of FirstBank, organic balance sheet growth, and continued repricing of fixed-rate assets. Considering loan growth, another key driver of NII, we expect roughly 12.5% average loan growth in 2026, with FirstBank contributing around 4.8% growth. Over the longer term, we forecast around 3.6% annual growth in its average loan balances, as we believe that the bank should benefit from proportionately stronger growth from its expansion efforts in the faster-growing US southern and western markets. Longer term, we project PNC’s net interest margin to normalize around 2.91%, which reflects our expectation of an upward-sloping yield curve and a midcycle federal-funds rate around 2.5%. Taken together, our 10-year NII CAGR forecast is 4.7%.

On the fee income side, we forecast 9.0% growth in 2026, excluding the impact of noncore items like gains on the Visa share exchange and losses from securities, with FirstBank contributing about 1% of the increase. Capital market fees and asset-based fees are the two most important fee income growth drivers in 2026, and we expect 25% and 8% growth, respectively. We expect normalized fee income growth of around 3.1% in the long run.

Turning to the firm’s expense base, we expect core expense growth of around 8.4% in 2026, excluding the one-time charges of integrating FirstBank and contribution to the PNC foundation. On a reported basis, we forecast 11.8% growth in total expenses in 2026. We think of its continued technology investments. As such, we forecast the firm’s efficiency ratio to reach around the mid-50s by the end of our 10-year forecast, which is much better than its adjusted 10-year average of 63.9% excluding its stake in BlackRock.

Finally, considering credit costs, we forecast PNC’s 2026 net charge-off ratio to be around 0.26%, higher than the 0.23% in 2025 but lower than the 0.33% seen in 2024. We expect the firm’s net charge-off ratio to normalize around 0.42% through the cycle. Overall, we expect an average return on tangible common equity of 16.9% in the next 10 years, much higher than our 8.9% cost of equity estimate for the firm.

We believe PNC Financial Services has carved out a narrow economic moat, based on durable cost advantages and switching costs that are consistent with our moat framework for banks. PNC has consistently earned returns on tangible equity in excess of our estimated cost of equity of 8.9% over the past decade, and we forecast the bank to generate returns on tangible common equity around 16.3% on a normalized basis.

We believe bank moats are derived primarily from two sources: cost advantages and switching costs. We see cost advantages coming from three primary factors: a low-cost funding base, excellent operating efficiency, and conservative underwriting. Regulatory costs must also be considered.

We assess PNC’s overall funding costs as slightly worse than the US regional banks under our coverage in the current interest rate cycle, and we don’t view its cost of funding as a major advantage compared with peers. The bank has a strong deposit market share in its home market, Pittsburgh, where it controls over 50% of deposits. This market alone represents over a quarter of PNC’s deposit base. That said, PNC’s coast-to-coast footprint dilutes its home market strength, and its expansion into some of the fastest-growing Sunbelt states that have higher deposit competition could weigh on its overall cost of funding. As such, we expect PNC to remain in line with its US bank peers in terms of funding costs, and don’t view performance here as distinguishing. More importantly, we think PNC really shines in scale and improved operating efficiency.

Considering the second pillar of our framework, operating efficiency, we believe PNC should maintain a durable advantage relative to its peers going forward. PNC gained significant scale from the 2021 BBVA USA acquisition, growing its balance sheet by around 25%. Historically, PNC has not been able to operate with a lower cost base compared with some of its more efficiently run peers, but we like the bank’s current scale, and we think that its operating efficiency should continue to improve going forward. We forecast an operating efficiency ratio of around mid-50s on a normalized basis for PNC, better than its 62.7% 10-year average over the past decade and comfortably in the range of moaty regional bank competitors. In terms of technology spending, we also think that scale matters. PNC has an annual tech budget around $3.5 billion, significantly higher than that of smaller regional banks. This should enable the firm to make sufficient investments in tech and digitalization that some of its smaller peers cannot. Apart from scale and tech spending, we think PNC’s comprehensive product offerings in retail banking, commercial banking, investment banking, treasury management, and asset management demonstrate economies of scope, and should allow the firm to fractionalize customer acquisition costs across a larger base of revenue, all else equal.

In terms of credit costs, we think that PNC has generally demonstrated superior underwriting capabilities compared with its peers. While PNC has been acquisitive, we believe that the bank has maintained its disciplined underwriting culture. For example, PNC completely revamped RBC USA’s loan underwriting after acquiring it in 2012, and we believe it should be able to maintain its underwriting prowess in future acquisitions. During the global financial crisis, PNC’s credit costs were much lower than its US peers, with its provisioning/net interest income ratio averaging around 27% from 2008-12, much lower than the peer average at 39%. During the more recent covid-related recession, PNC’s adjusted provisioning/NII of 6% between 2020-21, excluding the $1 billion in provisioning related to the BBVA USA acquisition, was also lower than the peer average of 10%. Overall, we believe that the US banking industry’s underwriting has improved after the global financial crisis. While PNC’s edge in credit costs over its peers might be lower in future credit cycles, we expect some edge to persist.

Lastly, regulatory costs matter both at the industry level and for PNC specifically. The US banking system has improved over the last decade, with capital levels at all-time highs and stronger post-crisis regulation. Despite intense competition, the largest banks by assets have earned higher returns on equity for decades and still do. Our long-run outlook is positive given the US's stable democracy, steady GDP growth, and reserve currency status. PNC is not large enough to be a global systemically important bank (GSIB), avoiding the most burdensome rules, but as a Category III bank still faces the Federal Reserve's annual stress tests, liquidity coverage rules, and supplementary leverage ratio, giving it one of the best relative regulatory cost positions among regionals we cover. We view the March 2026 Basel III endgame proposal and 2025 stress test changes as mostly positive. The key change for banks between $250 billion and $700 billion in assets is including accumulated other comprehensive income, or AOCI, in common equity Tier 1 capital, which PNC should handle well. Its adjusted CET1 ratio was 9.1% as of June 2026, above the 7.0% minimum. Category II rules would trigger if trailing 12-month average assets exceed $700 billion, expected around 2030 on organic growth alone.

We view switching costs as complementing these cost advantages for PNC. Importantly, we think that the bank’s full suite of services allows it to capably build deep client relationships, adding to customer switching costs. For example, PNC has treasury management penetration of 80% with its new commercial clients in its expansion markets, and it was also able to increase the penetration of BBVA USA’s client base to around 69% in 2024 from 43% when it closed the acquisition in 2021. As we see it, the broader the scope of a client’s relationship with the bank, the less likely they are to leave, as switching costs increase with product utilization and complexity.

The acquisition of FirstBank makes PNC as the bank with the No. 2 deposit market share in Denver and could result in above-market balance sheet growth for PNC.

PNC is making investments with 200 targeted new branch openings in some of the highest-growth MSAs in the US. This could improve the bank’s returns substantially if new branch productivity catches up with legacy branches.

PNC could increase its credit card penetration and wealth management cross-selling to retail clients; both could improve the bank’s return profile if executed well.

The US economy has some pockets of softness, particularly in the labor market recently. If the economy experienced a recession, PNC could face lower balance sheet growth and higher credit costs.

PNC remains asset-sensitive, and a significantly lower interest rate environment would be a headwind to the bank’s net interest margin and net interest income.

Fintech and other nonbank lenders are growing at a much faster rate than the US commercial banks. Commercial banks like PNC could struggle to keep up with technology spending and cede significant lending market share.