NEW YORK (TheStreet) -- The Federal Reserve's stress tests confirmed that PNC Financial Services Group (PNC) is "not too big and not too small," according to Oppenheimer analyst Terry McEvoy," supporting a higher valuation for the bank's shares.
PNC Financial Services group of Pittsburgh had $301 billion in total assets and an estimated Tier 1 common equity ratio at the end of the third quarter, on which the stress tests were based.
The bank sailed through the first round of stress tests, with the Federal Reserve projecting that under a "severely adverse scenario," with a brutal recession beginning in 2013, PNC would have relatively slight losses totaling $1.4 billion through the end of 2014, with a minimum Tier 1 common equity ratio of 8.7%.
That indicates plenty of excess regulatory capital above the minimum Tier 1 common equity ratio needed for banks to be considered well-capitalized under the stress tests. Among the 18 large financial holding companies going through the first round of stress tests, only three had higher projected minimum Tier 1 common equity ratios under the severely adverse scenario, including American Express (AXP), and the trust and custody giants Bank of New York Mellon (BK ) and State Street (STT).McEvoy in a report late Wednesday said the bank's "ideal size combined with PNC's diverse revenue stream should support future multiple expansion." PNC's shares closed at $65.93 Wednesday, trading for 1.3 times tangible book value, and for 9.6 times the consensus 2014 earnings estimate of $6.84 a share, among analysts polled by Thomson Reuters. "We believe the valuation gap between other high-quality banks (i.e., USB and BBT) and PNC will narrow, especially as the market begins to appreciate the merits behind the RBC bank deal," McEvoy wrote. The analyst rates PNC "outperform," with a 12- to 18-month price target of $72.00. Shares of BB&T (BBT) of Winston-Salem, N.C., closed at $31.57 Wednesday, trading for twice tangible book value, and for 10.0 times the consensus 2014 EPS estimate of $3.15. U.S. Bancorp (USB) of Minneapolis closed at $34.22 Thursday, trading for 2.7 times tangible book value, and for 10.4 times the consensus 2014 EPS estimate of $3.29.
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