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5 Bank Stock Picks for Your Portfolio From Deutsche Bank

3. PNC Financial Services Group

Shares of PNC Financial Services Group (PNC) closed at $61.86 Thursday, trading for 0.9 times tangible book value, and for nine times the consensus 2014 EPS estimate of $6.84. The consensus 2013 EPS estimate is $6.54.

PNC pays a quarterly dividend of 40 cents, for a yield of 2.59%.

The company fourth-quarter earnings of $719 million, or $1.24 a share, compared to earnings of $925 million, or $1.64 a share, in the third quarter, and $493 million, or 85 cents a share, in the fourth quarter of 2012.

Like many of the large-cap banks, PNC reported a number of one-time items, including a preannounced $91 million in expenses related to mortgage foreclosures, which included $70 million for the industry settlement. Other items included "a pretax provision of $254 million for residential mortgage repurchase obligations related to expected elevated levels of repurchase demands primarily as a result of further changes in behavior and demand patterns" of Fannie Mae and Freddie Mac," as well as "a $45 million goodwill impairment charge for the company's mortgage unit, and a gain of $130 million on the sale of Visa (V)." Together, the items lowered PNC's fourth-quarter earnings by 47 cents a share.

Another major item affecting the fourth-quarter earnings was a $318 million provision for credit losses, increasing from $228 million the previous quarter, and $190 million in the fourth quarter of 2011. CFO Rick Johnson said during the company's conference call that the provision "higher than the previous guidance of $150 million to $250 million, primarily due to the completion of our implementation of regulatory guidance for loans discharged from bankruptcy. A provision of $53 million was recorded in the fourth quarter related to this guidance."

O'Connor's price target for PNC's shares is $71, and he estimates the company will earn $6.52 a share in 2013, with EPS increasing slightly to $6.54 in 2014. The analyst said that "PNC stock was a meaningful underperformer in 2012 (up only 1% vs. +22% for the S&P Commercial Bank Index) and hasn't closed the performance gap much so far this year (+7% vs. +4%, respectively)," but that the shares are trading at a discount to peers, and "with the recent appreciation in BLK stock (+33% since 9/30), PNC's stake now represents $2-3 per PNC share--something we don't think is being fully appreciated by the market."

PNC said it will disclose more detail on its stake in BlackRock (BLK) when it files its annual report. The company reported that as of Sept. 30, it had a 22% economic interest in BlackRock, that its shares in BlackRock had a carrying value of $5.5 billion and a market value of $6.4 billion.

PNC Chart PNC data by YCharts

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