While I haven't written a ton about PNC Financial (PNC -0.43%) lately, the sixth-largest bank by assets in the U.S. has been a solid performer with a strong valuation and a very good dividend yield. The Pittsburgh, PA-based bank made a big move in 2020 during the pandemic when it announced that it would purchase the U.S. operations of the Spanish lender BBVA.

The bank made the move at a good time when the regulatory environment for large bank mergers was a lot friendlier and when bank valuations weren't too demanding. While it's still a little early to evaluate how that acquisition has turned out, I do think PNC is a reliable bank to own should the U.S. economy enter a recession. Here's why.

A healthy bill of credit

Credit quality is still by and large pretty clean across the banking system, with certain segments of the consumer segment beginning to show some cracks.

But it really looks clean at PNC, which has a large commercial franchise. Roughly 56% of the bank's loans are commercial and industrial (C&I) loans, which are typically variable-rate loans made to businesses or corporations. Typical uses include working capital and expense related to a business, such as purchasing equipment or inventory.

PNC also lends to several different industries within its C&I portfolio, making it not overly exposed to any one sector. The bank's largest C&I sectors are manufacturing, retail, service providers, and financial services. This strategy appears to have worked well so far, with credit quality really quite impeccable at the end of 2022.

PNC Financial credit quality.

Image source: PNC Financial.

The annualized net charge-off rate, or debt unlikely to be collected as a percentage of total loans and a good indicator of loan losses, was just 0.28% in the fourth quarter. That's actually up a bit, but includes a $100 million charge-off that PNC's CEO Bill Demchak called "anomalous" and that had already been reserved for.

Additionally, delinquencies and non-performing loans, which are a good indicator of charge-offs to come, fell in the quarter, and PNC is guiding for a smaller level of charge-offs in the current quarter than it had in the fourth quarter. The bank's allowance for credit losses is also nearly six times the level of charge-offs, and takes into account a mild recession.

A great dividend

PNC stock also carries a very strong dividend yield at more than 3.6%, and the shares trade at a good valuation, at more than 200% of the bank's tangible book value, or net worth, which is very strong for a bank stock.

PNC's payout ratio is also below 32.5%, which is again solid for a bank. Banks will typically have a dividend payout ratio of 25% to 40%, so there is ample room for PNC to increase its dividend if it chooses.

The bank has also done a marvellous job of growing and paying its dividend over a long period. PNC began paying a dividend in 1987, and while there have been some cuts along the way due to the various crises banks have dealt with, the bank has still been able to increase its dividend favorably. In 2009, during the Great Recession, PNC cut its quarterly dividend from $0.66 per share to $0.10 per share. Now the quarterly dividend is already back up to $1.50 per share.

In good shape

There are banks in PNC's peer group that could generate higher returns, but PNC is a well-balanced bank that will likely be able to manage well through a recession.

It has a great commercial lending franchise that can take advantage of loan growth if it's there, and management expects to generate healthy operating leverage this year, meaning it plans to grow revenue faster than expenses. That coupled with the dividend makes it a good bank stock to own in a more tenuous environment.