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2 Bank Stock Picks from Atlantic Equities

NEW YORK ( TheStreet) -- Atlantic Equities analyst Richard State on Thursday said that PNC Financial Services Group (PNC - Get Report) was his "preferred pick" among U.S. retail banks.

State compared the Pittsburgh lender with Wells Fargo (WFC - Get Report) and U.S. Bancorp (USB - Get Report) of Minneapolis, saying that all three "are generating a high return on tangible equity putting them in a strong position to maintain a high payout ratio," but that "PNC is the bank that has the greatest potential to reduce costs and raise profitability above current expectations."

All three banks "have a history of high payout ratios with 80% to 90% being typical from 2002 to 2007," according to Staite, who said that "a bank that generates an 18% ROTE and which is growing the balance sheet at 5% per year is able to payout over 70% of earnings with no deterioration in capital ratios," and that although banks are currently limited to paying dividends of up to 30% of earnings, "we believe this could increase nearer 40% over the long term once bank meet and exceed their fully Basel III requirements."

PNC

PNC's shares closed at $62.16 Wednesday, returning 10% year-to-date, following a 3% decline during 2011. The shares trade for nine times the consensus 2013 earnings estimate of $6.82 a share, among analyst polled by Thomson Reuters.

Based on a 40-cent quarterly payout, PNC's shares have a dividend yield of 2.57%.

PNC's operating returns on average equity (ROE) over the past five quarters have ranged between 5.44% and 10.62%, according to Thomson Reuters Bank Insight. Staite estimates that in 2013, the company's return on tangible equity will be 14.6%, and that excluding the company's 22% stake in BlackRock (BLK), 2013 EPS will be is $6.50.

Staite rates PNC "Overweight," with a $76 price target, saying the shares are "cheap," at 1.3 times tangible book value, compared to a price-to-tangible-book ratio of 2.6 for U.S. Bancorp, "even accounting for differences in business mix and profitability. The analyst's price target "implies a P/TB of 1.6x and is composed of $63/share for the core banking business plus $13 for the 22% stake in BlackRock." While PNC's "valuation has been dented" by its mortgage putback charges in the second quarter, Staite said "we think it will recover."

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