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PNC: Financial Loser

NEW YORK ( TheStreet) -- PNC Financial Services Group (PNC - Get Report) was the loser among large U.S. financial names on Monday, with shares pulling back 3% to close at $57.61.

The broad indexes recovered from earlier lows to close with 1% losses, after investors pushed the yield of Spanish 10-year bonds to 7.49% at the close of trading. That was the bond's highest closing yield since the creation of the Euro. Investors were concerned that following the agreement among eurozone officials on Friday for a bailout of as much as 100 billion euro for Spain's beleaguered banking sector, Spain itself may need to be bailed out.

The yield on 10-year U.S. Treasury paper declined by two basis points to 1.43%.

The KBW Bank Index (I:BKX) was down 1% to close at 44.45, with all 24 index components seeing declines, except for JPMorgan Chase (JPM - Get Report), which was up 2% to close at $34.44, and Bank of America (BAC - Get Report), which rose slightly to close at $7.09.

The nation's largest two banks are trading at very attractive historical valuations to tangible book value and earnings.

JPMorgan trades for just above tangible book value, according to Thomson Reuters Bank Insight, and for less than seven times the consensus 2013 earnings estimate of $5.21 a share, among analysts polled by Thomson Reuters. The consensus 2012 EPS estimate is $4.64. Based on a quarterly payout of 30 cents, the shares have a dividend yield of 3.48%.

Among 33 sell-side analysts polled by Thomson Reuters, 22 rate JPMorgan a buy, showing confidence that the company has put the bulk of its hedge trading losses behind it.

Bank of America's shares trade for just over half their reported June 30 tangible book value of $13.22, and for eight times the consensus 2013 earnings estimate of 83 cents. The consensus 2012 EPS estimate is 56 cents.

Out of 32 analysts polled by Thomson Reuters, only nine recommend investors jump into Bank of Americas share, while 20 analysts have neutral ratings, and three analysts recommend selling the shares, even at these low valuations, as the company's mortgage putback risk continues to increase.

PNC on Wednesday reported second-quarter earnings of $546 million, or 98 cents a share, missing the consensus estimate of $1.24, among analysts polled by Thomson Reuters.

The Pittsburgh lender's second-quarter results included previously announced mortgage putback charges of $284 million, or 54 cents, and $119 million in other charges for trust preferred redemptions and merger integration expenses related to the acquisition of RBC Bank (USA) in March.

A bright spot for PNC's second quarter was an increase of its net interest margin to 4.08% from 3.90% the previous quarter, and 3.93% a year earlier, running counter to the trend for most large regional banks in the prolonged low-rate environment.

PNC's shares have now returned 2% year-to-date, following a 27% decline during 2011.3

PNC Chart PNC data by YCharts

Based on a 40-cent quarterly payout, the shares have a dividend yield of 2.788.5%.

PNC's shares trade for nine times the consensus 2013 EPS estimate of $6.79. The consensus 2012 EPS estimate is $5.73.

Stifel Nicolaus analyst Christopher Mutascio rates PNC a "Buy," with a $74 price target, and said on Wednesday after the earnings announcement that if the mortgage repurchase charges and merger expenses were excluded, "we can arrive at a quarterly EPS run rate going forward of $1.74 assuming the company has fully accounted for higher loan repurchase demands/putbacks within the 2Q12 reserve build."

Mutascio said that PNC's margin expansion, "easily exceeded our expectations of 3.87%," adding that "of the $235 million sequential quarter increase in net interest income, we estimate that one-third ($80 million) was derived from higher accretable yield and two-thirds ($155 million) was driven by core margin expansion."

Stifel Nicolaus estimates that PNC will earn $6.00 a share for all of 2012, followed by 2013 EPS of $6.90.

Mutascio said that his price target "represents 10.7x our 2013 EPS estimate of $6.90 and 1.5x our 4Q13 estimated tangible book value per share of $50.16, which we believe to be reasonable valuation metrics for a company that is generating above peer returns on average assets ."

JPMorgan Chase analyst Vivek Juneja rates PNC "Overweight," with a $78 price target, saying on Monday that "PNC is expanding its business through recent acquisitions of Nat City and RBC's US bank franchise and actively growing fee based businesses including capital markets and treasury management as well as consumer businesses such as credit cards.

"PNC is trading at 1.4x tangible book, in-line with overall regional banks," Juneja said, adding that "we think should be trading closer to high quality banks given its track record of good revenue growth and conservative risk profile."

Interested in more on PNC Financial Services Group? See TheStreet Ratings' report card for this stock.

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