2 Bank Stock Picks from Atlantic Equities

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

State compared the Pittsburgh lender with Wells Fargo (WFC) and U.S. Bancorp (USB) 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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