BlackRock Makes PNC More Attractive: Is It Safe?

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PITTSBURGH (TheStreet) -- Shares of PNC Financial Services(PNC Quote) seem pricey, but the company's 46.5% stake in money manager BlackRock(BLK Quote) could make the bank a worthwhile long-term play.

BlackRock agreed in June to buy Barclays'(BCS Quote) asset management arm for $6.6 billion in cash and 37.8 million BlackRock shares. PNC is helping BlackRock finance the transaction with a $500 million preferred investment. While the deal will dilute PNC's position, the bank is expecting a $500 million gain when the deal is completed in December.

PNC, the fifth-largest U.S. bank holding company with $280 billion in assets as of June, was one of 10 companies ordered to raise capital after government "stress tests" of the nation's 19 biggest banks last spring. While the company raised $624 million and remains well-capitalized, its shares continue to trail those of other banks.

Since the S&P 500 Financials Index bottomed on March 6, PNC shares have climbed 97%, compared to 123% for the benchmark. Among the 18 publicly-traded companies subjected to stress tests, PNC had the worst-performing stock. Fifth Third Bancorp(FITB Quote), in contrast, returned 624%, while Bank of America(BAC Quote) and Citigroup(C Quote) each rose more than 300%.

Despite their weak performance, PNC shares were selling for 2.23 times tangible book value as of Friday. Among the tested companies, PNC's shares are the sixth most expensive, according to SNL Financial. State Street(STT Quote) and Bank of New York Mellon(BK Quote), companies with little exposure to problem loans, lead the list with multiples of about 4.5.

In an Aug. 24 report by AllianceBernstein Holding(AB Quote), analyst John E. McDonald downgraded PNC shares to "market perform," citing their relatively high valuation and "shrinking earnings cushion and capital ratios that lag peers."