As bank earnings week continues, investor sentiment toward the sector remains generally mixed. The latest to report their fourth-quarter earnings are the two largest super-regional banks in the country, U.S. Bancorp (NYSE:USB) and PNC Financial Services Group (NYSE:PNC), and their results were fairly pedestrian.
Both banks topped earnings estimates for the quarter but saw year-over-year declines in net income, mainly due to a one-time expense that all big banks faced. Both stocks were trending lower on Wednesday.
Special assessments prove to be a drag on earnings
Like the big four mega-banks that posted their earnings last week, both U.S. Bancorp, the fifth-largest bank, and PNC Financial, the sixth-biggest, were hit with a special assessment by the Federal Deposit Insurance Corp. (FDIC) that brought down their earnings. This special assessment was levied on large banks to shore up the FDIC’s Deposit Insurance Fund following the bank deposit crisis last spring, which hit smaller banks harder than larger banks.
U.S. Bancorp, which reported its earnings on Wednesday, got hit with a $734 million FDIC special assessment, along with another $171 million in charges related to its recent acquisition of MUFG Union Bank. Add in a $110 million charitable contribution, and that’s more than $1 billion in additional expenses, which caused non-interest expenses to jump 29% year over year to $5.2 billion.
As a result, despite a 6.2% increase in revenue to $6.8 billion, the bank’s net income was down 10% for the quarter to $766 million, or 49 cents per share. However, on an adjusted basis excluding notable items, the bank beat consensus estimates with $1.5 billion in adjusted net income, or 99 cents per share. U.S. Bancorp’s revenue also topped estimates.
It was a similar story for PNC Financial, which reported its earnings on Tuesday. PNC beat estimates but saw its earnings dip due primarily to higher expenses. PNC posted net income of $740 million or $1.85 per share, down 47% year over year. Non-interest expenses were up 17% year over year, or about $600 million, to $4.1 billion. The increase was entirely due to a $515 million FDIC special assessment and a $150 million workforce reduction charge. However, PNC beat consensus estimates with adjusted earnings per share of $3.16, versus the $2.99 EPS estimate.
PNC also beat revenue estimates, but unlike U.S. Bancorp, its revenue was down 7% year over year to $5.4 billion in the quarter. Net interest income fell 8% to $3.4 billion, largely due to higher funding costs. PNC saw its net interest margin drop 26 basis points from the fourth quarter of 2022 to 2.66%.
Outlook for 2024
Just as the fourth quarter was a mixed bag for these banks, it looks like more of the same in 2024. On the earnings call with analysts, U.S. Bancorp officials said they expected net interest income (NII) to be between $4 billion and $4.1 billion in the first quarter of 2024, on pace with Q4.
In its outlook, PNC sees its net interest income down 4% to 5% for all of 2024 and total revenue that is stable to down 2% for the year. Loans are anticipated to be up 1%.
This year will be an interesting one for banks, as lower interest rates should have an impact on their net interest income. However, there are also concerns about the economy and if that could impact loan growth.
While the outlook is murky for both, they each do have strong dividends. U.S. Bancorp raised its quarterly dividend to 49 cents per share in the quarter, marking the 13th straight year of dividend hikes. It has an excellent yield of 4.74%.
PNC maintained its dividend at $1.55 with a yield of 4.16%. Like US Bancorp’s, that’s a better-than-average yield, and PNC has also increased its dividend for 13 consecutive years.
In fact, PNC and U.S. Bancorp offer two of the best dividends in the industry, so they are worth a look on that basis. Beyond that, the outlook for both is not all that clear, so be cautious. Of the two, U.S. Bancorp looks like a better option, as it completed the integration of MUFG Union Bank and should start to see benefits from cost synergies and expanded revenue opportunities.
